[Senate Hearing 107-1018]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 107-1018
 
                     THE ADMINISTRATION'S NATIONAL
                   MONEY LAUNDERING STRATEGY FOR 2002
=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                                   ON

         THE COORDINATION AND THE FOCUS OF FEDERAL ANTI-MONEY 
 LAUNDERING PROGRAMS, ONE YEAR AFTER THE PASSAGE OF THE INTERNATIONAL 
 MONEY LAUNDERING ABATEMENT AND FINANCIAL ANTI-TERRORISM ACT OF 2001, 
                   TITLE III OF THE USA PATRIOT ACT.

                               __________

                            OCTOBER 3, 2002

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs







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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut     PHIL GRAMM, Texas
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia                 CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware           RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan            JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey           MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii              JOHN ENSIGN, Nevada

           Steven B. Harris, Staff Director and Chief Counsel
                Linda L. Lord, Republican Staff Director
                      Steve Kroll, Senior Counsel
   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
                       George E. Whittle, Editor

                                  (ii)















                            C O N T E N T S

                              ----------                              

                       THURSDAY, OCTOBER 3, 2002

                                                                   Page

Opening statement of Chairman Sarbanes...........................     1

Opening statements, comments, or prepared statements of:
    Senator Enzi.................................................     3
    Senator Stabenow.............................................     6
        Prepared statement.......................................    36
    Senator Carper...............................................    32

                               WITNESSES

Charles E. Grassley, a U.S. Senator from the State of Iowa.......     4
John F. Kerry, a U.S. Senator from the State of Massachusetts....    36
Kenneth W. Dam, Deputy Secretary, U.S. Department of the Treasury     7
    Prepared statement...........................................    38
Larry D. Thompson, Deputy Attorney General, U.S. Department of 
  Justice........................................................    10
    Prepared statement...........................................    61
Stuart E. Eizenstat, former Deputy Secretary, U.S. Department of 
  the
  Treasury.......................................................    24
    Prepared statement...........................................    65
Elisse B. Walter, Executive Vice President, Regulatory Policy and 
  Programs,
  National Association of Securities Dealers.....................    27
    Prepared statement...........................................    69
Alvin C. James, Jr., former Senior Money Laundering Policy 
  Advisor, U.S.
  Department of the Treasury.....................................    28
    Prepared statement...........................................    73

              Additional Material Supplied for the Record

The 2002 National Money Laundering Strategy, dated July 2002.....    79

                                 (iii)








                     THE ADMINISTRATION'S NATIONAL
                   MONEY LAUNDERING STRATEGY FOR 2002

                              ----------                              


                       THURSDAY, OCTOBER 3, 2002

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 9:40 a.m., in room SD-538 of the 
Dirksen Senate Office Building, Senator Paul S. Sarbanes 
(Chairman of the Committee) presiding.

         OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

    Chairman Sarbanes. Let me call the hearing to order.
    We are holding this hearing today to review the 
Administration's 2002 National Money Laundering Strategy. This 
Committee has devoted a great deal of time to the anti-money 
laundering measures over the past year. In fact, a year ago 
tomorrow, the Committee unanimously passed path-breaking 
legislation that became Title III of the USA PATRIOT Act. We 
held an oversight hearing on that legislation, January 29, and 
we are holding a second oversight hearing today.
    I am especially pleased that Senator Grassley is able to be 
with us this morning. He has taken a strong role on this issue, 
along with Senators John Kerry and Carl Levin. I have Senator 
Kerry's statement which will be included in the record, and 
Senator Levin has indicated that he intends to submit a 
statement for the record.
    Before I turn to Senator Grassley, I just want to say a 
couple of words about the issue. During the last year, the 
anti-money laundering agenda has been dominated by the 
financial war on terrorism. The Federal Government has taken 
unprecedented steps to lead international efforts to disrupt 
and disarm international terrorist financing networks.
    According to Deputy Secretary Dam, the United States and 
other countries have frozen more than $112 million in assets 
related to terrorist organizations. Treasury has also worked to 
implement the various provisions of Title III of the USA 
PATRIOT Act, a job that is not yet fully complete. It has 
produced the necessary rules in a steady and timely sequence, 
and while one may differ on occasion with some of the 
substantive choices made, I do think that there has been a 
committed effort to meet the statutory deadlines.
    The short-term focus on clandestine financial movements 
designed to fund terrorism is understandable in the 
circumstances. But it should not detract attention from two 
issues affecting the broader range of Government anti-money 
laundering efforts.
    The first issue is that we have not yet assigned 
responsibility for the success or the failure of these efforts. 
Working against money laundering means more than prosecuting 
particular individuals. It means combining civil regulatory 
criminal enforcement and diplomatic initiatives. And the 
question is who is the responsible person if the necessary 
combination does not occur?
    The question is especially relevant to last year's 
legislation, which dealt in large part with cross-border 
transactions, especially international banking and money 
movement.
    Implementing regulations are written by the Department of 
the Treasury. But the bank supervisory agencies, the SEC, and 
now the CFTC, examine various classes of financial institutions 
for compliance with the rules.
    Although the IRS is supposed to examine a vast range of 
nonbank institutions, including hawala money transmitters for 
compliance, a reorganization of the revenue service has made it 
difficult for it to find staff resources for such audits.
    The Treasury retains ultimate authority to impose penalties 
for noncompliance with the new rules. But the experience has 
been that that job is usually left to the bank supervisors 
under different authority.
    The second issue is the Government's difficulty in 
developing a fully coordinated approach to combat money 
laundering as a separate crime, again, in part because no one 
is responsible for doing so, or authorized to overcome 
organizational resistance.
    Now, central coordination I think has been in place to a 
significant extent to deal with terrorist funding. But that 
organization has not been duplicated to deal with narcotics-
based money laundering, or with problems associated with 
correspondent banking and off-shore shell companies.
    Some of the proposed transfers in the Homeland Security 
legislation heighten these questions, particularly the transfer 
of the Customs Service and the Secret Service. The Customs 
Service has been a leader in money laundering investigations 
and the Secret Service's expertise in dealing with credit card 
crimes is increasingly relevant to money laundering cases.
    There are also reports that indicate that the enforcement 
arm of the Bureau of Alcohol, Tobacco, and Firearms, and 
perhaps all or part of FinCEN, could also be moved, either to 
the Department of Justice or the new Department of Homeland 
Security, so that Treasury would have little or no law 
enforcement capacity remaining outside of the Internal Revenue 
Service.
    The possibility of shifting these investigative resources 
make it all the more important to examine how to centralize the 
formation and coordination of all Federal anti-money laundering 
efforts.
    By bringing attention to these issues, I do not mean to 
minimize the difficulties involved in carrying out a unified 
anti-money laundering program. Money-laundering involves a 
complex set of problems that cut across jurisdictional and 
subject matter boundaries. But, we must face this challenge and 
it is one of the things that we need to explore in this 
hearing.
    With that, I yield to Senator Enzi.

              STATEMENT OF SENATOR MICHAEL B. ENZI

    Senator Enzi. Thank you, Chairman Sarbanes. I appreciate 
your willingness and diligence with this issue. I also want to 
thank the witnesses who will be testifying today. This issue is 
of the utmost importance and the timing of the hearing is 
extremely important.
    Since September 11, the Congress and the Administration 
have worked in conjunction in an attempt to decide how to 
defeat an evasive and deadly enemy. Terrorists and terrorist 
organizations offer new threats to the security of the American 
people and we have to do everything possible to defeat them.
    I am proud to say that this Committee acted almost 
immediately after the September 11 tragedy to explore avenues 
to stop the financing of terrorism. Through bipartisan efforts 
led by Chairman Sarbanes and Senator Gramm, and the efforts of 
Senators Levin and Grassley, this Committee passed the 
International Money Laundering Abatement and Financial Anti-
Terrorist Act of 2001. This legislation developed far-reaching 
laws which will assist our local law enforcement community in 
stopping funds from going to the enemy.
    Many of the provisions included in the bill required 
regulatory action by the Department of the Treasury and the 
Department of Justice. Now, as these regs are written, it is 
critically important that Congress remain aware of the 
implementation and areas that we may need to readdress to 
assist in the efforts to stop the flow of funds to these 
organizations.
    However, this is not just a domestic issue. Combatting 
terrorist financing is a global issue which requires the 
assistance of all our allies and, quite frankly, our allies are 
happy to finally have us joining the battle.
    Chairman Sarbanes and I have the privilege of being the 
Congressional delegates to the United Nations. Chairman 
Sarbanes has always conducted himself as a diplomat, and now he 
actually has diplomatic status and rank.
    [Laughter.]
    In that capacity, he and I are able to witness the 
coalition-building taking place on the international front. An 
example of good work being done is the United Nations Security 
Council Counter-terrorism Committee, or CTC. The CTC was 
created by the Security Council Resolution 1373 after the 
attacks of last September and with full support from the United 
States.
    With the exemplary leadership of Sir Jeremy Greenstock, 
British Ambassador to the United Nations, the CTC has gathered 
reports from over 170 individual nations. The Committee has 
made suggestions on how these nations can continue to improve 
their financial monitoring systems in the fight against 
terrorism.
    Although not all reports to the CTC have shown effective 
action being made by nations, the knowledge garnered from the 
international community can be used to find links between 
charities, NGO's, and terrorist organizations.
    I have had the opportunity to work with Ambassador 
Greenstock and am very pleased with his leadership on the CTC. 
I am also pleased to hear of his support for regional 
organizations taking a larger role in the fight against 
terrorism.
    I am concerned, however, about the future of this work. The 
information gathered has been remarkable. But now we are faced 
with the question of what to do with it.
    The CTC was not designed to take action, just to gather 
information. It is up to the international community to 
cooperate and use this information. When cooperation on money 
laundering is not a high priority, the entire world is at risk. 
It only takes one nation with lax laws to provide terrorists 
and money launderers a safe place to hide.
    Again, Mr. Chairman, I appreciate your holding this 
hearing. I look forward to working with you and the other 
Members and I look forward to the testimony of Senator 
Grassley. He is always one of the best-prepared people, 
particularly on issues that require a lot of detail. And that 
is an unusual combination around here.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. Thank you, Senator Enzi.
    Senator Grassley, we would be happy to hear from you.

                STATEMENT OF CHARLES E. GRASSLEY

             A U.S. SENATOR FROM THE STATE OF IOWA

    Senator Grassley. Thank you, Mr. Chairman, and Senator 
Enzi, most importantly for the invite at a time when Congress 
winds down. I think it shows on the part of you and your 
Committee that this is a very important issue and that you 
cannot let this issue drag or be unattended, or we are not 
really going to get things done that need to be done.
    In 1997, when I first started thinking about what would 
eventually become the Money Laundering and Financial Crimes 
Strategy Act, there were a couple of facts that I highlighted. 
First, I believed then, and still do, that money laundering 
poses a significant threat to our country. It undermines 
legitimate financial transactions, promotes corruption, and 
funds terrorism. It also allows profits from a plethora of 
illicit transactions, from drugs to prostitution to gambling.
    Second, it seemed to me at that time that to best respond 
to this threat, we needed a comprehensive and coordinated 
response. Coordinated not only between Federal law enforcement 
agencies, but between regulators, industry experts, and 
policymakers. And to accomplish this coordination, we would 
need a plan.
    Working with Representatives Velazquez and Leach, as well 
as the former Chairman of this Committee, Senator D'Amato, we 
agreed that the best way to encourage a comprehensive, 
coordinated response to money laundering was to require the 
development of a national strategy on money laundering. As a 
model, we used Operation El Dorado, a joint venture between 
Federal, State, and local law enforcement in New York City. 
Operation El Dorado was able to identify and shut down money 
laundering in a segment of the money transmitter industry. We 
hoped that that strategy would take the lessons learned from 
Operation El Dorado and apply them on the national level. But 
it does not seem to have been duplicated elsewhere.
    These elements of cooperation and coordination which made 
the Strategy an important concept in 1998, make it essential 
today. We know that money laundering is the functional 
equivalent of a war industry for terrorist groups. More than 
ever, I am convinced that we need a coherent, comprehensive 
response on the issue. If we are going to ensure the legitimacy 
and security of our financial system, while protecting the 
privacy of investors, then everyone, from law enforcement to 
bank regulators, need to understand the threat and what their 
particular role is in addressing that threat. Difficult topics 
or turf disagreements cannot be swept under the rug. And those 
do exist.
    Unfortunately, this latest strategy falls short of the 
goal. I am disappointed to have come to this conclusion. But we 
must think clearer about what can be done, and we must exercise 
leadership and establish responsibility to ensure that it 
happens.
    This is not a criticism of current efforts. Most of the 
efforts we are making, such as Treasury's Operation Green Quest 
or the Terrorism Financing Review Group at Justice, are doing a 
great job. I am confident Deputy Dam and Deputy Thompson will 
give you a full report. But there are weaknesses that these 
groups and others have identified in our financial system that 
we need to address if we are going to make an effective 
difference. And unfortunately, these weaknesses are not 
discussed in this latest Money Laundering Strategy.
    For example, Mr. Chairman, I am concerned that not enough 
attention is being paid to the correspondent accounts U.S. 
banks have established. While the USA PATRIOT Act moved the 
ball significantly forward, it appears that greater steps 
should be taken that may not be best accomplished with 
additional legislation.
    We know that even today, a satchel of thousands of U.S. 
dollars can be taken to a foreign bank that is willing to 
accept the deposit with no questions asked. The foreign bank, 
through its correspon-
dent relationship with a U.S. bank, will provide either readily 
negotiable U.S. dollar checks drawn on a U.S. bank or wire 
transfers initiated by the U.S. bank in exchange for the cash. 
These checks and wire transfers are drawn on the account of the 
foreign bank with the U.S. bank, effectively hiding the source 
of the funds.
    And since no banker wants to hold excess currency, the 
foreign banker, who does not have the option of sending his 
excess dollars to the Federal Reserve Bank, deposits the 
dollars in his U.S. cor-
respondent account. This is a gaping hole in our money 
laundering net. It circumvents all the safety measures that the 
legislation put in place--yet it is not discussed at all in 
this Money Laundering Strategy. What we have instead is a 
report on current activities. Only actions currently underway 
are addressed, and potential new components which have been 
discussed in the past--such as the report required in the 2001 
Strategy on the roles lawyers and accountants play in money 
laundering--are ignored.
    I believe a strategy should not be a report card on what 
has been done, but, instead, should provide a roadmap to where 
we want to be tomorrow. It should identify threats and the 
tools needed to address these threats. And it should provide 
direction for the steps necessary to reach objectives. If we 
are going to avoid duplication or inconsistent, ad hoc 
responses to these new threats, then we need to develop a 
clear, systematic approach to money laundering.
    We have had such a document in the past. The 2000 Strategy 
was a strategic document. The 1999 Strategy was as well, 
although it wasn't released until the end of the year. But both 
documents identified problems, and then listed specific steps 
that would or should be taken to address these challenges. They 
charged specific, individual offices with action items. And 
each of us may have had some difficulties with where the 
Strategy was taking us--but any good strategy will be 
controversial. It laid out a coherent, compre-
hensive plan to deal with money laundering, nevertheless.
    If we were going to address money laundering in a 
coordinated and effective manner in the future, then we must 
have a coherent plan of action. An effective strategy should be 
released at the beginning of the year, before funding decisions 
are made. By law, the 2003 Strategy is due February 1. It 
should talk less of targeting the individuals who manipulate 
the system, and more about how to make the methods that they 
use no longer workable. And it should outline the steps 
necessary to get from where we are today to where we want to 
be.
    I know that we can do better. I know that we have to do 
better. And I hope that when the 2003 Strategy is released 
early next year, it is. Thank you again for the invite. I look 
forward to continuing to work with the Members of the 
Committee, and particularly the Administration, on this 
important issue.
    Chairman Sarbanes. Thank you very much, Senator Grassley, 
and thank you again for your constant efforts on this issue.
    I do just want to underscore one point you made.
    Of course, this Strategy came late. But the next report is 
due in February of next year. I think the Committee should 
obviously have a review of that report, which I hope will be on 
time, or close to it, shortly after it is released, and we look 
forward to again interacting with you in that regard.
    I think your suggestion that in addition to reviewing what 
has been done, which is always helpful, of course, as you look 
to moving ahead, but I think you are right, we need to have a 
strategic plan that focuses on other concerns as well.
    So, as we move ahead, we are really getting a comprehensive 
framework into place to deal with this issue. I think it is 
extremely important. And I look forward to continue to work 
with you in that regard.
    Senator Grassley. If that Strategy is delivered timely, it 
is going to come at the time that we develop the budget and 
then for the hearings of the Subcommittees of Appropriations. 
And if there is more money needed, it is going to be much more 
easy if we have that Strategy plan with us at that time.
    Chairman Sarbanes. I think that is an excellent point.
    Senator Enzi.
    Senator Enzi. I just want to thank Senator Grassley for the 
excellent testimony and the ideas that he has here.
    Chairman Sarbanes. Senator Stabenow, do you have any 
questions of Senator Grassley?

              COMMENTS OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman. Not a question, 
but just to thank Senator Grassley for all of his work on this 
issue.
    Another issue Senator Grassley has raised and I have raised 
on the Committee is the issue of concentration accounts. I know 
that we have been jointly urging the Department to move forward 
on rules related to concentration accounts, and I am interested 
in what the Department has to say in terms of being updated 
today.
    But I appreciate your comments and share your concerns.
    Senator Grassley. And maybe we should review our 
coordinated effort on that to see if we need to take any 
additional steps at this point.
    Senator Stabenow. I agree. Thank you.
    Chairman Sarbanes. Senator Grassley, we thank you very 
much.
    Senator Grassley. Thank you.
    Chairman Sarbanes. We look forward to continuing to work 
with you.
    Senator Grassley. Thank you.
    Chairman Sarbanes. If our next panel could come forward, 
Deputy Secretary Dam and Deputy Attorney General Thompson.
    Senator Stabenow, you have joined us since we made opening 
statements. I would yield to you now if you have a statement 
you might wish to make.
    Senator Stabenow. I would just submit one for the record, 
Mr. Chairman, and thank you again for this hearing. I am proud 
of the work that we did last year and I know that this was the 
focal point for really moving forward. I am anxious to hear 
what the Department has to say as they have taken the 
legislation that we worked on and passed last year.
    Chairman Sarbanes. Yes. Well, I want to thank the Committee 
Members for their commitment last fall when we took up this 
issue. We had actually scheduled a hearing on money laundering 
before September 11 happened. It was to occur about a week 
later. So, we were turning our attention to that issue and 
then, of course, September 11 occurred, which raised this to a 
crisis matter. And we were able, by working very diligently 
over a number of weeks last fall, to put together a good piece 
of legislation that became one of the titles of the USA PATRIOT 
Act.
    Secretary Dam, I think we will go to you, and then to 
Attorney General Thompson, unless you have worked out some 
contrary arrangement amongst yourselves.
    Mr. Dam. No, that would be fine.
    Chairman Sarbanes. All right.

                  STATEMENT OF KENNETH W. DAM

       DEPUTY SECRETARY, U.S. DEPARTMENT OF THE TREASURY

    Mr. Dam. Mr. Chairman and distinguished Members of this 
Committee, I appreciate this invitation to testify. I have a 
fairly lengthy prepared statement which I think will be 
helpful, but I would just like to summarize it briefly and ask 
that the full statement appear in the record.
    Chairman Sarbanes. The full statement will be included in 
the record and we appreciate the effort and care that went into 
the preparation of the full statement.
    Mr. Dam. Thank you, Chairman Sarbanes.
    I will focus on three principle areas--our progress on the 
financial front of the war on terrorism, the 2002 National 
Money Laundering Strategy, and the implementation of the USA 
PATRIOT Act.
    Now with regard to the first principal area, the financial 
front of the war on terror is critically important to America's 
success in fighting terrorism. Our strategy is set forth in the 
National Money Laundering Strategy as Goal 2. There, we make it 
clear that we need a multifaceted strategy, which includes 
intelligence gathering, freezing of suspect assets, law 
enforcement actions, diplomatic efforts and outreach, smarter 
regulatory scrutiny, outreach to the financial sector, and 
capacity building for other governments and the financial 
sector generally.
    These efforts are having an impact. As you, Mr. Chairman 
just pointed out in your opening statement, the United States 
and other countries have frozen more than $112 million in 
terrorist-related assets. But to see the full effect of the 
action, you cannot just count the money that has been seized. 
You also have to look at the flow of funds that has been 
disrupted. And just to illustrate that, I want to take one 
example. The al Barakat network, which is a worldwide network 
which was, according to some estimates, channeling $15 to $20 
million a year to al Qaeda. We have not only frozen the assets, 
but we have also cut that flow, and it is the flow that is 
critically important.
    I wish to underscore the importance of the international 
cooperation we have received. After all, you cannot bomb a 
foreign bank account. So, we need the cooperation of other 
governments in order to achieve our objectives. And since 
September 11 of last year, we have obtained strong 
international cooperation. All but a small handful of countries 
have pledged support and over 160 countries actually have 
blocking orders in force. Hundreds of accounts worth more than 
$70 million have been blocked abroad, and foreign law 
enforcement agencies have acted swiftly to shut down terrorist 
financing networks. I have given you several examples in my 
written testimony, but let me just refer as one example to last 
month's joint action by the United States and Saudi Arabia to 
refer to the U.N. Sanctions Committee a man named Wa'el Hamza 
Julaidan, who was an associate of Osama bin Laden and a 
supporter of al Qaeda terror. And of course, we also have 
blocked any accounts.
    Now, let me turn to the National Money Laundering Strategy 
as a whole. It is a strategic document, not a report card. But 
I can go into that at greater length. I would like to point out 
now that this Strategy involves 26 different U.S. Federal 
agencies, and they have all concurred in this Strategy. The 
Strategy lays out six specific goals. And I would like to refer 
to some specific aspects.
    As I mentioned, of course, disrupting terrorist financing 
is one of the major goals. But one of the things we have done 
that is new here is to show our determination to measure 
results. This is part of a general philosophy that is contained 
in the President's Management Reform Agenda. But I do not think 
I have to tell you that Secretary O'Neill, with his background 
and his experience, is very much focused on the results. Inputs 
are one thing, but results are another. And this strategy is 
focused on measuring the effectiveness of our program.
    The last two Strategies have been focused more, and 
particularly 2002, on attacking large transnational, 
professional money laundering organizations. And we highlight 
this in our Goal 3. Now these kinds of cases, as opposed to 
just picking up somebody on the street take time to develop. 
But, nevertheless, we are having some early successes. And let 
me just point out one illustration.
    Earlier this year, the Customs agents in New Jersey 
arrested an Assistant Vice President of a bank who was 
operating an illegal money transmitting business that moved 
approximately a half-billion dollars in 8 months. This 
Assistant Vice President maintained over 250 accounts at the 
bank, 44 of which were in the names of nonexistent companies 
and people that were fronts for currency exchanges, or actually 
firms, in Brazil. So this is an example of what you can 
accomplish if you focus on a large organization.
    Let me turn now to the USA PATRIOT Act.
    Chairman Sarbanes. What happened to that fellow?
    Mr. Dam. This has been dismantled and I will get you an 
answer on exactly where the status of the case stands. Perhaps 
Deputy Attorney General Thompson can provide that.
    Chairman Sarbanes. All right. Well, I will defer and I wait 
until the question period.
    Mr. Dam. Thank you very much.
    Turning to the implementation of the USA PATRIOT Act 
itself, our major accomplishments over the past 11 months 
include the following: Together with the Federal functional 
regulators, we issued customer identification and verification 
regulations. We have developed a proposed rule that seeks to 
minimize the risks presented by correspondent banking and 
private banking accounts. We expanded our basic anti-money 
laundering program requirement to the major financial service 
sectors, including insurance and unregistered investment 
companies such as hedge funds.
    Now all of this is spelled out in my written testimony, but 
I grant you, we do have work to do. For example, I am not 
satisfied with the pace of our deliberations over the first use 
of the powers that you gave us in that Act under Section 311. 
We can go into that later if you would like, but it does raise 
some difficult legal and policy questions which our lawyers and 
our administrators have been wrestling with. But I can assure 
you that Treasury is working hard to invoke those powers and I 
expect to do so quite soon.
    Let me come to the conclusion.
    These three aspects of our program which I have just 
highlighted, the financial war, the Money Laundering Strategy, 
and the USA PATRIOT Act, are all interrelated. As we move 
forward on them together, I think we are making a difference.
    Our combined efforts are making it increasingly more 
difficult for terrorists to use the U.S. financial system. We 
are disrupting the ability of terrorists to plan, operate, and 
execute attacks. And we are forcing terrorists to use methods 
such as bulk cash smuggling that hadn't been necessary before 
to finance their operations. Now forcing terrorists to resort 
to bulk cash smuggling has some benefits. Principally, I would 
point to the fact that smuggling exposes both the courier and 
the cash or other financial instruments to a greater risk of 
detection and seizure by the authorities, and I want to give 
you an illustration and some figures.
    Since last September 11, Customs has seized over $9 million 
in cash being smuggled out of the United States to Middle 
Eastern destinations or with some other Middle Eastern 
connection.
    As an example of what has been accomplished beyond that, 
this summer, Customs, Secret Service, and FBI agents 
apprehended, and there was a subsequent indictment of 
Jordanian-born Omar Shishani. This was in Detroit, where 
Shishani came in on a flight, and because of the work that had 
been done to get information systems to work together, we were 
able to search and find that, contrary to his declaration, he 
was actually smuggling in $12 million in forged cashier's 
checks. So, he was vulnerable because he had to use this 
device.
    Now, I want to mention one other development. Just last 
month, I announced that we were forming a USA PATRIOT Act Task 
Force. And the purpose of that task force is to take a second 
look at the regulations we promulgated over the last 11 months 
and to ensure that they are doing a good job of disrupting 
terrorist financing, and I might say also, doing a good job in 
the money laundering aspects of terrorist financing and other 
financing, and to do so in a way that imposes the least burden 
necessary on the privacy interests of our citizens and our 
financial sector.
    It will be a group to address some of the kinds of 
questions that have been raised, including the question that 
Senator Grassley was raising about correspondent banking 
relations--of U.S. financial institutions.
    We look forward to working with you and your staffs on this 
project and I would be pleased to take any questions you may 
have.
    Thank you very much.
    Chairman Sarbanes. Thank you very much, Secretary Dam.
    General Thompson, we would be happy to hear from you.

                 STATEMENT OF LARRY D. THOMPSON

      DEPUTY ATTORNEY GENERAL, U.S. DEPARTMENT OF JUSTICE

    Mr. Thompson. Thank you, Mr. Chairman.
    Mr. Chairman and Members of the Committee, I am pleased to 
appear before the Committee this morning to discuss with you 
issues related to money laundering, including the 2002 National 
Money Laundering Strategy and our progress on the financial 
front of our ongoing war on terrorism.
    And I, too, like Deputy Secretary Dam, have a detailed 
prepared statement, but would like to discuss with you this 
morning in summary form with respect to issues in the prepared 
statement, and some additional issues.
    Chairman Sarbanes. The full statement will be included in 
the record.
    Mr. Thompson. Mr. Chairman, I appreciate your attention to 
this important issue and your interest in the Administration's 
ongoing efforts to refine our battle plan against domestic and 
international money laundering.
    Initially, I would like to thank the Members of this 
Committee, as well as all the Members of Congress, for your 
efforts in developing and in passing two landmark pieces of 
legislation in prompt response to the threats that our Nation 
has encountered over the past year. The USA PATRIOT Act, passed 
in response to the horrible attacks of September 11, provided 
those of us whose mission it is to protect the people of the 
United States with a wide array of new measures that will serve 
to enhance our ability to carry out this important work. The 
Sarbanes-Oxley Act of 2002, passed in response to the threat to 
our economic well-being posed by corporate criminals, was a 
signal to those who seek to cheat hard-working Americans that 
these kinds of actions will not be tolerated. You should be 
proud of your accomplishments in passing these extraordinary 
bills, and on behalf of the dedicated men and women in law 
enforcement, we thank you for your efforts in this behalf.
    Chairman Sarbanes. Thank you.
    Mr. Thompson. The 2002 National Money Laundering Strategy 
makes significant strides in advancing our battle plan against 
money laundering and, in fact, addresses some formidable issues 
head-on. In Goal 1, the Strategy confronts the issue of 
defining the scope of the money laundering problem and the 
development of measures of effectiveness, and Deputy Secretary 
Dam addressed that in his opening statement. Goal 2 addresses 
the critical issue of terrorist financing, and I will discuss 
the Department's progress on this front in more detail later in 
my summary testimony.
    I would like to focus at this point on Goal 3, which 
constitutes the core of the 2002 Strategy for purposes of law 
enforcement. This Goal sets forth what the Department believes 
are the major challenges in attacking money laundering. The 
first objective of Goal 3 is to enhance our interagency 
coordination of money laundering investigations. The first 
priority in this regard is to establish an interagency 
targeting team to identify money laundering related targets for 
our priority enforcement actions. This interagency targeting 
team has already been created and has met on several occasions. 
The purpose of this group is to identify those organizations or 
systems that constitute significant money laundering threats 
and to target them for coordinated law enforcement action.
    The second priority in Goal 3 is to create a uniform set of 
undercover guidelines for Federal money laundering enforcement 
operations. And our well-intended agents in the field are 
sometimes limited in conducting joint undercover operations, 
for example, because they must follow different agency 
guidelines. If we can find ways to overcome these differences 
or develop uniform guidelines that address the concerns and 
priorities of all of the agencies, our efforts in conducting 
these operations I believe will be significantly enhanced.
    And the third priority of Goal 3 is to work with our 93 
U.S. Attorneys' Offices to develop the Suspicious Activity 
Reports (SAR) Review Teams, as we call them, where they do not 
currently exist but could add value. These SAR Review Teams are 
another vehicle for promoting interagency coordination. When an 
interagency task force is created to review the SAR's in a 
coordinated manner, the value of the SAR's is enhanced and 
investigative priorities can be identified and better 
coordinated. DOJ and Treasury are both promoting the value of 
these SAR Review Teams to the investigators and prosecutors in 
the field. And I am proud to say that, according to an Internal 
Revenue Service survey of their SAR Review Teams, our U.S. 
Attorneys' Offices participate in 37 of the 41 Teams that have 
been established nationwide to date.
    Objective 2 of Goal 3 focuses on the High-Risk Money 
Laundering and Related Financial Crime Area, HIFCA Task Forces. 
The HIFCA concept was another attempt to coordinate the 
resources of all of the law enforcement and regulatory agencies 
in a jurisdiction on the most significant money laundering 
targets or threats in that particular region. Now, Mr. 
Chairman, while a number of issues have hampered the HIFCA's 
from reaching their true potential, the 2002 Strategy will have 
DOJ and Treasury reviewing the HIFCA program and refining the 
mission, composition and structure of the Task Forces so that 
they can fulfill the mission that was intended for them.
    With regard to Goal 2 of the Strategy, we have no greater 
priority than the prevention of further terrorist attacks 
against our citizens. We believe that the use of every tool in 
our arsenal is necessary to do that, including terrorist 
financing enforcement. And this is one of the focuses of this 
Committee. If we can identify would-be terrorists through 
financial techniques, or prosecute them for traditional 
financial crimes, or target their supporters and operatives 
with the crime of terrorist financing, we will be preventing 
violent attacks that may otherwise occur.
    The Department's terrorist financing enforcement efforts 
are centered around two components the Attorney General 
established in the aftermath of the September 11 attacks.
    Within the Criminal Division, Mr. Chairman, we created the 
DOJ Terrorist Financing Task Force, a specialized unit 
consisting of experienced white-collar prosecutors drawn from 
several U.S. Attorneys' Offices, the Tax Division, and some 
litigating components of the Criminal Division. These are 
Washington-based prosecutors and they work with their 
colleagues around the country, using financial investigative 
tools in an aggressive manner to disrupt groups and individuals 
who represent terrorist threats.
    In the field, the Attorney General created 93 Antiterrorism 
Task Forces to integrate and coordinate antiterrorism 
activities in each of the Federal judicial districts.
    The criminal laws relating to terrorist financing are 
powerful tools in enhancing our ability to insert law 
enforcement into terrorist plots at the earliest possible stage 
of their conspiratorial planning. For example, the statute that 
makes it a crime for anyone subject to a U.S. jurisdiction to 
provide anything of value, including their own efforts or 
expertise, to organizations designated as ``foreign terrorist 
organizations,'' was used recently in the Charlotte, North 
Carolina Hezbollah case, the John Walker Lindh matter, the 
recent New York indictment of supporters of Sheik Rahman, and 
the actions that we took over the past few months in Seattle, 
Detroit, and Buffalo. It is a powerful preventive tool.
    The financial investigative tools at our disposal, which 
have been refined over the years for use in combatting money 
laundering, can also be employed in terrorist financing 
enforcement. And to the extent that we succeed in raising the 
global standards for money laundering prevention or enacting 
tools that help our own efforts in this area, I believe we will 
be enhancing the world's and our own ability to stop terrorist 
financing. In this sense, terrorist prosecutors are using money 
laundering as an important tool in these prosecutions. And 
terrorism prosecutors and money laundering prosecutors are 
beginning to share that same expertise, which I think is 
important.
    Now no discussion about money laundering would be complete 
without a discussion about what we are trying to do with 
respect to drug money and our efforts to stop it. No one can 
tell us with any kind of certainty how much drug money is 
laundered in our country. But we do know that users in the 
United States spent at least $63 billion on drugs last year, an 
astonishing sum. Now since assuming the Office of Deputy 
Attorney General, I have made our Organized Crime Drug 
Enforcement Task Forces the centerpiece of the Department's 
effort to attack the supply side of the drug problem. The 
Attorney General and I announced this past March a new strategy 
to use OCDETF, as we call the Organized Crime Drug Enforcement 
Task Forces, to go after the entrenched and significant drug 
trafficking and drug money laundering groups. Integral in this 
Strategy is the use of money laundering charges, financial 
investigations, and forfeiture. In fact, Mr. Chairman, our new 
guidelines issues to the U.S. Attorneys now require that each 
OCDETF investigation must contain a financial component, and 
that the results of those investigations must be documented. 
And I can assure you that we will be closely reviewing the 
results of these investigations in order to use our scarce 
resources in the most effective way possible. We are trying to 
take the money away from these organizations in order to 
completely dismantle their illegal structure and prevent them 
from doing what they have been doing in the past.
    In conclusion, I would like to express the appreciation of 
the Department of Justice for the continuing support that this 
Committee has demonstrated for the Administration's anti-money 
laundering enforcement efforts.
    Mr. Chairman and Members of the Committee, thank you for 
this opportunity to appear before you this morning. I look 
forward to working with you as we continue the war against 
terrorist financing and all forms of money laundering, and to 
refine our Strategy to address these serious threats. I would 
be happy to try to answer any questions that Members of the 
Committee may have.
    Thank you.
    Chairman Sarbanes. Thank you very much.
    Secretary Dam, I wanted to pick up on the reference to 
Section 311 and focus attention on that.
    We provided in Section 311, authority to the Secretary of 
the Treasury to impose five special measures against foreign 
jurisdictions, foreign financial institutions, or transactions 
involving such jurisdictions or institutions that were 
determined to pose a primary money laundering concern to the 
United States.
    The special measures were pretty encompassing, I thought, 
requiring additional recordkeeping or reporting, requiring the 
identification of the foreign beneficial owners of certain 
accounts at U.S. financial institutions, requiring the 
identification of customers of a foreign bank who use an 
interbank payable through an account opened by that foreign 
bank at a U.S. bank, requiring the identification of customers 
of a foreign bank who use an interbank correspondent account 
opened by that foreign bank at a U.S. bank, and restricting or 
prohibiting the opening or maintaining of certain interbank 
correspondent or payable through accounts.
    Now these are pretty extensive authorities. But it is my 
understanding that you have yet to use this authority. Is that 
correct?
    Mr. Dam. That is correct, Senator.
    Chairman Sarbanes. What is the problem?
    Mr. Dam. I am going to answer that. But can I first answer 
your earlier question about the New Jersey case, just because I 
think it is very important?
    Chairman Sarbanes. Yes.
    Mr. Dam. Criminal charges have been filed against the 
senior executive of the bank whom I mentioned, and there is a 
general investigation trying to develop all of the facets of 
the case before proceeding further. We have seized many of the 
accounts that were involved and we will be glad to give you a 
detailed written response beyond these simple points that I 
have made.
    I would also like to say that in the 2002 Strategy 
document, there is an Appendix 7, that is at page A-14 of the 
Appendix, which lists quite a number of major cases that had 
been developed in 2001 and 2002 before we were able to publish 
it in July.
    I think that illustrates what is possible if you focus on 
the big networks because most of these are cases involving 
major firms or major networks. So, that is one of the emphases, 
I guess I should say, in this strategy. We want to push in that 
direction.
    Chairman Sarbanes. Let me just follow up.
    What happened to the supervisors of that bank vice 
president? Are they being punished in any way? Obviously, there 
must have been some breakdown in supervision.
    Mr. Dam. I agree with you. And I think that is what the 
broader investigation is designed to get at. But I will include 
that in the response and we will get that to you quite 
promptly.
    Chairman Sarbanes. Thank you.
    Mr. Dam. With regard to your question about Section 311, 
now I too have been wondering why we have not gone forward yet, 
and I am a little impatient on that score, as I suspect that 
you are.
    Actually, there are some factors to bear in mind. One of 
them is, this is a terrific set of empowerments of measures 
that we can impose. But, because they are so far-reaching, they 
have some substantial due process and procedural concerns that 
have been raised. And you know, we try to be very careful and 
not overreach, particularly when we get into areas such as due 
process. So that is one factor that has been brought to my 
attention.
    The second one is evidentiary. We believe that we have to 
develop a record that will stand up if there is a case brought 
to set aside any measure that we impose. It is like terrorist 
financing in that regard, although in terrorist financing, we 
do have certain rights given to us in the USA PATRIOT Act to 
present the classified evidence in camera to the judge. And my 
impression is, and I believe I am correct on this, that that 
power does not extend to Section 311 measures. So, we are 
trying to be sure that we have a good record before we use 
this.
    There is one other factor to bear in mind when it goes to 
the question of imposing Section 311 measures on a country. You 
can do it against a foreign jurisdiction, against institutions, 
and so forth. However, when you are thinking about countries, 
one of the important points here is that we want to get 
compliance with money laundering procedures, compliance with 
the FATF 40 recommendations, and imposing sanctions may be 
counterproductive to achieve that goal.
    In fact, we have a good record, I think, through the FATF 
in making progress with foreign jurisdictions and in nearly 
every case, countries have made progress and many of them are 
getting off the FATF list, and more will be taken off the FATF 
list when the plenary meeting occurs just next week. I would 
say that we are making good progress in bringing foreign 
countries along.
    I think that you need to think of the 311 measure there 
like the club that we keep in the closet, rather than as the 
objective of the measure being actually to use that power.
    Those are some of the considerations. But I want to 
underscore the fact that I, too, am very interested in why we 
have not been able to use those powers yet.
    Chairman Sarbanes. Well, of course, if you keep the club in 
the closet all the time, eventually, people come to think that 
you are not going to use it. So you need to try to focus on its 
use, at least in some instances, to send the message that in 
fact it can be used and you get the deterrent effect of that.
    Your point on foreign jurisdictions is one that needs to be 
carefully thought through. But you can act against a foreign 
financial institution and you can also act against transactions 
involving certain accounts. And it would seem to me that, in 
looking over the landscape, you can pick out a couple of 
instances that really would lend themselves to the invocation 
of Section 311, so people know that this club is not only 
there, but also on occasion, it will be used. Otherwise, I 
think that they eventually reach the conclusion that there is 
no backup here.
    Mr. Dam. I agree with you, Mr. Chairman.
    Chairman Sarbanes. Yes. My time has expired. I yield to 
Senator Stabenow.
    Senator Stabenow. Well, thank you, Mr. Chairman. I 
appreciate the testimony of both of our distinguished 
witnesses.
    I would like to refer to a letter and ask Mr. Dam if you 
can respond, and both of you are certainly welcomed to make 
responses as it relates to the use of concentration accounts.
    There was a letter that was sent back on January 11 of this 
year, by Senator Grassley, Senator Carl Levin, and myself and I 
would appreciate knowing what has happened since that time. I 
do not believe we have had a written follow up to that.
    But Section 325, which I advocated that we place into the 
bill that we passed, explicitly authorizes the Treasury 
Secretary to prescribe regulations to close an existing 
loophole in the regulations governing how U.S. financial 
institutions operate their internal administrative financial 
accounts, often called concentration omnibus, or suspense 
accounts. We know that dollars that come into an account when 
that is used, as you know, they are pooled. The concern is that 
it breaks the audit trail. It is difficult to track the dollars 
coming out to specific accounts.
    I know, in the past, probably the most notorious case was a 
money laundering case regarding drugs with Raoul Salinas and 
what happened back in the 1990's.
    But I am concerned at this point that we should be moving 
forward to focus on these accounts and draw upon the statement 
that the Federal Reserve issued actually back in July 1997, in 
their sound practices paper on private banking.
    And again, I would just read this and then ask you to 
comment and also what in fact, if anything at this point, has 
been done to focus on concentration accounts.
    However, the Federal Reserve back in 1997 issued a warning. 
Unfortunately, it was only to U.S. private banks and not all 
institutions. It was a guideline, not a binding regulation.
    They did say at the time that private banking operations 
should have the policies and controls in place to confirm that 
a client's funds flow into and out of the client's accounts and 
not through any other accounts, such as an organization's 
suspense, omnibus or concentration accounts.
    Generally, it is inadvisable from a risk management and 
control perspective for institutions to allow their clients to 
direct transactions through these other accounts. Such 
practices effectively prevent association of the client's name 
and account numbers with specific account activity, could 
easily mask unusual transactions and flows, the monitoring of 
which is essential to the sound risk management in private 
banking and could easily be abused.
    In the context of the debate in the Committee a year ago, I 
had raised this, as did Senator Grassley and Senator Levin. We 
did place a requirement to move forward on regulations and we 
are very anxious to know if the Department has begun moving in 
that direction.
    Mr. Dam. Thank you, Senator. Yes, I know about your 
interest in this subject. And let me say that we are moving 
forward on Section 325. We have formed an interagency working 
group that has been meeting and considering what types of 
controls should be imposed. One thing that has become clear is 
that many of the abuses that we are talking about here are 
violations of existing rules and are being dealt with under 
those rules.
    But we, frankly, have been very concerned with meeting the 
deadlines, which are quite good deadlines and have forced an 
enormous amount of work with regard to other provisions which 
have specific near-term deadlines, and we have issued quite a 
long group of very voluminous regulations, rules, and that 
takes time. And I would just like to explain why it takes time 
to do that.
    We have a very extensive process of consultation with the 
financial institutions involved. After all, these rules and 
regulations we promulgate have to be workable. And they work 
best when the financial institutions feel that they are 
reasonable and do not impose undue burdens on them.
    That does not mean we are soft, but it does mean that we go 
through this extensive consultation process. I know from 
personal experience that we have gotten very favorable feedback 
from our major financial institutions because of that. But in 
any event, we are continuing to work on the subject of 
concentration accounts.
    Now with regard to the letter you read, private banking is 
often a term used to refer to two things. You could have a 
major commercial bank which had private account managers. These 
are large accounts and so forth. And there, the commercial 
banks are already subject to important regulations.
    The concentration account provisions of 325 will 
undoubtedly bear on them, too. There are also private banks, 
like hedge funds and so forth, and they are now subject to 
regulations we promulgated--I believe they are proposed at this 
point. But, nevertheless, the hedge funds know what they have 
to do, which requires them to put in place something that they 
never had to have before, which was money laundering programs.
    And not only that. Since they are private banks and they 
are not subject to normal Federal regulation, they now have to 
register with FinCEN, so that we know who they are and we will 
be able to follow up. So, we are moving against that target as 
well.
    Senator Stabenow. I appreciate that and I think it is 
obviously important to work with the industry, so that whatever 
is done is workable.
    My question would be, though, do you believe that this, in 
fact, is an issue, a loophole that concentration accounts are 
accounts that can and have been abused and will be a focus of 
your efforts, along with the other issues that you are 
addressing?
    Mr. Dam. I will give you a personal opinion. If we could, I 
would like to give you a written response in general to what we 
are finding in the working group. However I will say that the 
Congress and you have identified this as a problem. You have 
given us the authority. We plan to use the authority. And we 
need to come out with rules that implement Section 325.
    Senator Stabenow. We would very much appreciate knowing an 
update from you on what is happening and where it fits into 
your priority list. And it looks like by not putting a deadline 
in there, next time we will put a date in, with all the other 
dates that were put in the bill. I realize that you have a lot 
to do and have been working diligently. But this is an issue 
that has come to my attention a number of different ways.
    I would be curious, Mr. Thompson, and I can see my time is 
up, but I do not know if you have anything to add. If you had 
situations occur where the use of concentration accounts, 
pooling of funds, and the loss of audit trails because funds 
are designated to a specific account, whether that has been an 
issue?
    Mr. Thompson. Well, in addition to the efforts that the 
Treasury Department is making in terms of defining the nature 
of this problem, as I mentioned in my testimony, Senator, we 
are establishing these targeting teams across interagency, in 
connection with the interagency process.
    I do not have any personal knowledge with respect to these 
concentration accounts and how they are being used, for 
example, in illegal narcotics trafficking, but I would like to 
look at that and also at how we are targeting systems, as well 
as just targeting organizations and leaders. We are targeting 
systems. This looks like the kind of thing that we need to take 
a look at, especially as it relates to drug enforcement. And I 
would be pleased to get back to you on that.
    Senator Stabenow. Thank you.
    Mr. Thompson. Because as I was listening to your exchange 
with the Deputy Secretary, I do see how it could be applicable 
to our drug enforcement efforts.
    Senator Stabenow. Absolutely. Thank you. I would appreciate 
it if you could get back to us on what you are doing or how 
much you think that this is an issue.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. I think that this is a very important 
line of questioning that Senator Stabenow has been following.
    Secretary Dam, we appreciate that the Treasury had a heavy 
burden imposed upon them in terms of developing regulations to 
carry out the anti-money laundering legislation. As Senator 
Stabenow notes, we did not have a deadline on these 
regulations, although we had them in many other areas. I think 
you are close to completing that process, most of your rules 
and regulations. I think there are only a couple of projects 
left.
    So, I would anticipate that before the end of the year, you 
will be there. And therefore, I think that the next hearing 
that we would be thinking of holding would be fairly early in 
the new year, after we get the strategic plan, which is due the 
first of February. Then you would have an opportunity to have 
put all your rules and regulations into place and we could take 
a good view of the landscape and where things are. We have to 
keep at this and we must not lapse back.
    I want to ask General Thompson, immediately after September 
11, there were a number of press reports about alleged 
suspicious trading activity in the European markets, which 
suggested that people with advanced knowledge or associated 
with those attacks had sought to profit by taking short 
positions in the airline and insurance markets in the weeks 
leading up to the attack. At the time, the Justice Department 
indicated that they would investigate that matter. What can you 
tell us about where that matter stands?
    Mr. Thompson. Senator, I am aware of those instances that 
you are talking about. But as I sit here this morning, I am 
really not in a position to specifically respond to exactly 
where those investigations are. I will be happy to give you a 
written response.
    Chairman Sarbanes. But there are investigations underway. 
Is that correct?
    Mr. Thompson. I do not know.
    Mr. Dam. Senator, may I respond to that question?
    The only investigation that I am aware of was done by the 
Securities and Exchange Commission. And my understanding of 
their finding is that they did not find specific credible 
evidence to support that newspaper story or those newspaper 
stories. But if we have anything more on it, we will certainly 
provide it to you.
    Chairman Sarbanes. My understanding is that inquiries to 
the SEC have resulted in the response that the Justice 
Department is the lead agency on that matter.
    Mr. Dam. Those may both be true, Senator. I just do not 
know. We will have to get back to you on that.
    Chairman Sarbanes. All right.
    General Thompson.
    Mr. Thompson. I am aware of one investigation and 
prosecution in the domestic area in which a person who was 
employed by the Federal Bureau of Investigation was charged 
with using some improper information as it related to those 
events. But I just do not know where we stand with respect to 
any other investigation.
    Chairman Sarbanes. How is this reorganization going to 
impact our efforts in this arena, as it relates to the 
Department of Homeland Security? I have great difficulty in 
seeing how all this is going to work.
    The Treasury is going to continue to be the responsible 
agency for promulgating these regulations, but you are not 
going to have any enforcement backup. Is that correct?
    Mr. Dam. Well, Senator, I heard what you said earlier about 
that. I do not believe that it has to unfavorably impact 
efforts in this area.
    You mentioned that perhaps part of FinCEN would go to 
Homeland Security. Unless the Congress so determines, I do not 
believe that would happen. It is certainly not anything that is 
proposed by the Administration. It is the first that I have 
actually heard of it and it strikes me as questionable to do 
that because the fact of the matter is that the great strength 
of the Treasury in this respect, and of FinCEN, is the contact 
with the financial community.
    That is a set of relationships that have been built up by 
many Administrations over a long period of time. We really need 
the cooperation of the financial community. It is not 
fundamentally a prosecutorial activity or even a law-
enforcement activity. It is a set of arrangements whereby, to 
be sure, with the force of law, they are required to file 
reports and do certain things more and more now with the USA 
PATRIOT Act. But for this to work smoothly and quickly, it is 
very important to get real buy-in from the financial community. 
And not just commercial banks, but the broker-dealers, 
insurance companies, and so on.
    So it seems to me that that strength will remain in 
Treasury. What is moving out of Treasury under the Homeland 
Security proposal is Customs and Secret Service. I do not want 
to get into a debate about whether they are to remain integral 
or not, but they will move as a body into Homeland Security and 
presumably, they will continue to participate in the way they 
do now in all of these activities. They will be part of the 
working groups and so forth. I do not think that has to be the 
result.
    Another very important point here is that the Internal 
Revenue Service, Criminal Investigative Service, is extremely 
important in money laundering activities, as perhaps Deputy 
Attorney General Thompson can testify even more than I can, 
because he has had actual experience of cases where they have 
been involved. And they remain very much in Treasury. They are 
excellent forensic accountants who can really go into these 
complicated cases.
    Chairman Sarbanes. They are short-changed, though, on 
personnel, aren't they, in a serious way to deal with this 
matter?
    Mr. Dam. That is an interesting question. I do not want to 
express a personal opinion because I have not done the 
personnel investigation that would be necessary. There is a 
great demand for their services, I will tell you that, because 
there is something called the Webster Commission Report, with 
Bill Webster, who was head of the FBI and head of the CIA. His 
report says that they should all be devoted to tax matters. And 
there are other people who say, well, we need more of them in 
the money laundering area.
    I think we have worked out a good accommodation and I am 
sure with more money, there could be more of these people hired 
and make a contribution. But it is like everything else, it is 
a trade-off of scarce resources with many tasks.
    Chairman Sarbanes. I always thought that the extra money 
that was required to enhance the IRS's capabilities in these 
two areas you mentioned more than paid for itself in terms of 
the results they produce. Isn't that correct?
    Mr. Dam. That is probably correct. But you know, that is 
probably like many things the IRS does. So that is always an 
argument for giving the IRS more money, although their 
resources have been not necessarily increased.
    We do have an arrangement--just so I am not misunderstood--
a large number of IRS-CI employees are devoted right now to the 
drug problem in OCDETF and so forth. And as I say, the whole 
responsibility and leadership there is Mr. Thompson. He knows 
more about that than I do and perhaps he can shed light on it.
    Mr. Thompson. Senator, as I mentioned earlier, the 
Department is concerned about money laundering and using the 
really great and powerful money laundering tools in a number of 
law enforcement actions, and not just in our antiterrorism 
work, but in other kinds of law enforcement.
    Chairman Sarbanes. Now, do you have these task forces that 
you talked about, that you said were antiterrorism, do they 
also exist to deal with other forms of money laundering, or 
only in the terrorism field?
    Mr. Thompson. No, they also exist to deal with other forms 
of money laundering, Senator.
    For example, I mentioned our Organized Crime Drug 
Enforcement Task Forces, which is very important in order for 
us to get at the supply side of the drug enforcement problem. 
And that is, to identify the leaders of drug-trafficking 
organizations, identify the significant organizational 
structures in those criminal activities, and to dismantle them. 
The only way to do that, and the only way to get at dismantling 
those organizations is through asset forfeitures, through money 
laundering charges.
    The IRS has been a very important participant in the past 
in that program. In 1990, we had, I believe, over 850 IRS 
agents assigned to our very important work in that program. 
They participated in 69 percent of our OCDETF investigations. 
This year, we are down to 450 agents and only 38 percent of our 
OCDETF investigations. And what we have done in trying to 
retool this effort in our OCDETF and drug enforcement efforts 
is to make certain that we do not lose sight of how important 
and how essential it is to have financial investigations along 
with all of these significant drug enforcement investigations.
    But getting to your question to the Deputy Secretary with 
respect to what is going to happen to our money laundering 
efforts if the new Department of Homeland Security is created 
as we expect it to be, we believe that because of the 
Department of Justice's expertise in a number of these areas, 
and because of our resources, we would be in a position to 
assume a greater leadership role in these money laundering 
efforts, working with our colleagues at Treasury.
    I agree with Deputy Secretary Dam that Treasury will need 
to continue a very important role in these efforts because of 
their relationships with banks and financial institutions. But 
we do believe from a law enforcement standpoint that the 
expertise and the resources of the Department of Justice would 
make the Department uniquely suited to take a greater 
leadership role in what we are doing in our money laundering 
law enforcement efforts.
    Chairman Sarbanes. Has the Department reviewed the 
legislation with an idea of coming to the Congress for any 
changes or any additions that it may needed made in order to 
enhance its capabilities to deal with this problem?
    Mr. Thompson. I know that with respect to the Department of 
Homeland Security, Senator----
    Chairman Sarbanes. No, no. I mean with respect to the anti-
money laundering title that we passed last year.
    Mr. Thompson. Let me just address the resource issue.
    I know that we are seeking to reprogram our OCDETF efforts 
to provide additional monies or additional focus for training, 
joint training of FBI and DEA agents. And we are seeking to 
reprogram our efforts to provide the establishment of a special 
task force to investigate money laundering havens.
    As I see what we are trying to do, we need the resources to 
be able to use the very powerful tools that you have given us 
so that we can better do drug enforcement efforts and our law 
enforcement efforts as it relates to corporate fraud.
    I think that is an important part of our analysis of this 
legislation and our efforts in terms of how we can do our jobs 
better.
    Chairman Sarbanes. Yes, I think that is a valid point. But 
I still want to come back to the question, which is whether, in 
reviewing the statute that was put into place, you feel that 
there are changes that should be made that would enhance your 
abilities to address this problem?
    Mr. Thompson. I am not aware of specifically what we have 
done along those lines, Senator.
    Chairman Sarbanes. Well, maybe both the DOJ and Treasury 
could undertake to do that. But at the time we hold our next 
hearing on this issue, which I would anticipate sometime in the 
early part of the next year, we would have a chance to get the 
benefit of any recommendation.
    Did you want to speak to that, Secretary Dam?
    Mr. Dam. Well, I just wanted to say, Mr. Chairman, that was 
one of the motivations in creating this internal Treasury Task 
Force. And it will work with other departments and agencies and 
with the private sector to see if additional legislation is 
necessary.
    Now it might in some cases be to reduce authorities if they 
are creating a problem. But more likely, it will be to fill in 
gaps.
    We certainly will have in mind the timetable that you 
mentioned and be able to express an opinion at that time as to 
whether additional authority or some other kind of change is 
required in the legislation, and we will work with Justice.
    Chairman Sarbanes. When we have passed the point where 
people can say, well, we are still baking the cake because we 
do not have all the rules and regulations in place yet, or we 
are still baking the cake because we haven't figured out how we 
are going to do all the allocation of resources and so forth.
    We are beyond that point and we are now, in a sense, moving 
ahead. Then we need to look to see what else needs to be done 
to bolster this effort. And then, of course, carefully examine 
what the results of the effort are.
    As I indicated in my opening statement, I do think we face 
some difficult questions on coordination. Of course, Senator 
Grassley was very strong on the point of great strategic 
thinking as we go into the future.
    So, I think I just should leave that charge with you as we 
think of the early part of next year. As we get the next Money 
Laundering Strategy report, as Senator Grassley pointed out, we 
will be in the budget process, so there may be efforts to bring 
about important change, although you can do that now as the 
budget is being put together, rather than us trying to do it 
later when the budget comes to us. And I encourage you in that 
regard.
    Mr. Dam. Could I respond to one aspect of what you just 
said?
    I thought that, in general, Senator Grassley made a very 
fine statement. But I do find the last three or four paragraphs 
a little misleading, perhaps, because in talking about the need 
for strategy and knowing who does what and when, I think that 
is exactly what is different about the new Money Laundering 
Strategy from the past. The past was very much focused on how 
can we spend more money on this problem, rather than what 
specifically do we have to do. And you will notice if you look 
through the actual document, that for each and every priority, 
and there are many, there is a specific statement of who is 
responsible and a specific statement of what was accomplished 
in 2001 and what was accomplished in 2002.
    If you have a copy, for example, I could point to page 11, 
Priority 3, which has to do with going out and seizing the 
money. Who has the lead?
    Well, the lead is shared between Justice and Treasury and 
there is a very specific person in the Treasury, the Director 
of the Executive Office of Asset Forfeiture, and in Justice, 
the Chief of the Asset Forfeiture and Money Laundering section 
who is responsible.
    In 2001, for the very first time, the two Departments 
actually established a definition of what is money laundering, 
so that they could actually figure out what they had done in 
seizures because there are other kinds of seizures that are not 
money laundering seizures. For 2002, we are establishing a 
reporting system, so we actually know what we are accomplishing 
in taking the money away from the money launderers.
    So it seems to me that that is exactly the kind of thing 
Senator Grassley is calling for and I think it is here. I agree 
that it was not present in the past to nearly the same extent. 
I think you will find that for each and every priority, we have 
indicated who is in the lead and what they are going to do in 
2002.
    Now will they accomplish it all? I do not know. But it is 
not because they do not know what they are supposed to do to 
carry out the Strategy.
    Chairman Sarbanes. How often do you and General Thompson 
meet on this question of the Money Laundering Strategy?
    Mr. Dam. Well, in principle, we meet every month. I have to 
say that is not always true. We also talk to each other a great 
deal.
    Chairman Sarbanes. You meet every month on this issue?
    Mr. Dam. Or whatever issues are open. And often it is money 
laundering questions we have had quite a number of 
conversations about the allocation of the IRS agents, for 
example, of how we can fund more agents because Justice finds 
them extremely useful.
    Chairman Sarbanes. Can one say that the Deputy Secretary of 
the Treasury and the Deputy Attorney General meet monthly to 
coordinate and examine the Money Laundering Strategy?
    Mr. Dam. I wouldn't go quite that far, not that maybe that 
is not a good idea and maybe we should do that, but we do in 
principle try to meet every month to go over all of the open 
items between Treasury and Justice.
    Chairman Sarbanes. Now do the Secretary and the Attorney 
General ever meet on this question?
    Mr. Dam. I cannot answer that question. I know they meet. 
But I cannot answer that question.
    One of the things that I hope this new Treasury Task Force 
will do is reach out specifically to Justice, but also all the 
other non-Treasury agencies, bureaus, and departments in order 
to be sure that we are on track.
    I know that there are a lot of working groups working every 
week on these tasks that are laid out, one of which I just 
referred to, like the reporting system on seizures. And at that 
level, we meet constantly.
    Chairman Sarbanes. Gentlemen, thank you very much.
    It has been a very helpful panel and presumably, we will 
see you not too far into the new year to review once again 
where we are. And hopefully, at that point, to have gotten 
under our belt a lot of the start-up aspects of this effort, 
which we are still engaged in.
    Thank you for coming and being with us.
    Mr. Dam. Thank you, Mr. Chairman.
    Mr. Thompson. Thank you, sir.
    Chairman Sarbanes.
    We will now call the next panel. We are very pleased to 
have this panel with us.
    Stuart Eizenstat, now a partner at Covington & Burling, but 
with a very long and distinguished career in public service and 
a great familiarity with the issues we are dealing with. He, in 
fact, served as Deputy Secretary of the Treasury in the 
previous Administration and was the lead official on anti-money 
laundering initiatives and was also our Ambassador to the 
European Union in 1993 to 1996.
    Elisse Walter is the Executive Vice President for 
Regulatory Policy and Programs at the National Association of 
Securities Dealers. She has held senior positions at both the 
SEC and the CFTC. In her current position at the NASD, she 
oversees the operating legal and policy activities for the 
securities industry and is responsible, as I understand it, for 
monitoring the steps the securities industry is taking to 
create anti-money laundering and reporting programs pursuant to 
the legislation.
    Alvin James, a Principal at Ernst & Young, has much 
expertise in investigating money laundering schemes, 
particularly the Colombian Black Market Peso Exchange. He has 
been a Senior Money Laundering Policy Advisor to the Financial 
Crimes Enforcement Network and a Special Agent in the IRS 
Criminal Investigation Division.
    We are very pleased to have this panel here.
    Secretary Eizenstat, why don't we start with you? Then we 
will go to Ms. Walter and we will close out the panel with Mr. 
James.

                STATEMENT OF STUART E. EIZENSTAT

                    FORMER DEPUTY SECRETARY

                U.S. DEPARTMENT OF THE TREASURY

    Mr. Eizenstat. Thank you, Mr. Chairman. I appreciate your 
continued leadership on this issue because effectively dealing 
with money laundering is not only essential to dealing with 
narcotics trafficking, organized crime, and corruption abroad, 
but also with terrorism financing and therefore, national 
security directly as well.
    The Bush Administration has made important advances in 
dealing with money laundering and antiterrorism funding. Some 
terrorist funds have been frozen. Organizations and individuals 
have been designated under IEEPA, and our allies have helped 
block their accounts. But the Bush Administration has barely 
scraped the surface of what needs to be done. There is no 
genuine strategy to attack money laundering and money 
launderers. IEEPA designations have become less frequent.
    Our Government is still not properly structured internally 
to focus priority attention on terrorist financing. There is no 
existing international entity to work exclusively on locating 
and blocking terrorist money. And we have not put the kind of 
pressure we have to convince nations in the Middle East and 
Persian Gulf, who are the principal locations and transit 
points for terrorist financing, to bring their laws and 
practices on money laundering and the tracking of terrorist 
money up to international standards. Until these steps are 
taken to shut down the financial sources of terrorism, our 
Nation will remain vulnerable.
    We have disrupted, but we are a long way from dismantling, 
al Qaeda's financial network. During the Clinton Administration 
we established that the bulk of al Qaeda's wealth did not come 
from Osama bin Laden's inherited personal fortune, but rather 
from multiple sources and was distributed through multiple 
sources. This money comes from both businesses cloaked with the 
mantle of legitimacy and from criminal activities, from petty 
crimes to the heroin trade in Afghanistan. But its principal 
source of money, Mr. Chairman, comes from its fundraising 
activities through ``charities,'' mosques, financial 
intermediaries, and financial institutions. Charities and 
individuals in Saudi Arabia have been the most important source 
of funding. In our Clinton Administration, two missions were 
sent to the Gulf and Saudi Arabia to enlist their support in 
shutting down these charities and dealing with these 
individuals, but we received virtually no cooperation.
    Let me suggest the outlines of a strategy. First, on the 
U.S. Government side, we have to more effectively coordinate 
the several branches of our Government working on this issue. 
The Interagency Policy Coordination Committee on Terrorist 
Financing, chaired by the General Counsel of Treasury has made 
strides in this direction, but it is neither institutionalized 
nor possesses clear lines of authority. We must have a high 
level coordinator within the U.S. Government that has the 
President's ear to coordinate the diplomatic law enforcement 
and regulatory activities of our Government and focus our 
Government's attention on terrorist financing on a continuous 
and sustained basis.
    Second, we must ensure greater attention at the 
international level to the problem of money laundering in 
general, and terrorist funding in particular.
    The Financial Action Task Force, FATF, has done a good job 
of placing an international spotlight on those countries which 
do not meet international standards in dealing with money 
laundering, and thus, can be misused by terrorist groups to 
launder their money. During the Clinton Administration, we 
began important elements of a dual track policy of both 
tracking terrorist funds and working to upgrade international 
money laundering strategies and standards. Fifteen nations were 
cited as being noncooperative in the international fight 
against money laundering in 2000, and we followed up those FATF 
actions, Mr. Chairman, with our own hard-hitting advisories to 
U.S. financial institutions, recommending enhanced scrutiny 
against potential money laundering transactions involving those 
countries. The reaction was positive. Bahrain, UAE, and Egypt 
passed anti-money laundering laws. Panama, Israel, and 
Liechtenstein took important steps to bring their laws up to 
international standards and were removed from the list.
    But, frankly, this important initiative seems to have hit a 
snag. I am very concerned that the Bush Administration may be 
retreating from the strong effort to identify noncooperating 
countries. Only last week, it was reported that FATF was 
planning to agree to suspend for at least 1 year its practice 
of identifying noncooperating countries. This, Mr. Chairman, 
would be a serious mistake. The plan to abandon the 
blacklisting practice somehow contemplates in its place an 
increased role by the IMF and the World Bank. But these are not 
contrary to each other. Indeed, hopefully, the Administration 
will continue to publicize noncomplying nations through the 
FATF process, while also encouraging a greater role for the IMF 
and World Bank.
    FATF is only part of the solution. There is no 
international organization dedicated solely to tracking 
terrorist funds. We should work with our G7 and G8 partners to 
create such an organization, working in parallel to FATF. The 
Greenberg Task Force on the Council on Foreign Relations 
dealing with terrorist financing, of which I am a member, will 
have detailed recommendations here and in terms of our 
international organization, by the end of the month.
    It is critical to establish international standards through 
this new organization to regulate charitable organizations, put 
money laundering on the agenda of major international fora, and 
set international standards to regulate hawalas.
    The Administration needs to place the issue of terrorist 
funding on the regular agenda of every major international 
event--APEC, ASEAN, and the twice annual EU-U.S. Summits. With 
regard to the EU, unless our EU allies and their banking 
systems employ the same approach as we have, and maintain the 
degree of political commitment necessary to achieve financial 
transparency, then the value of our Government's work with our 
own financial institutions will be greatly reduced.
    The EU countries have taken some positive steps to 
cooperate in tracking down terrorist funds. But, frankly, the 
robustness of their regulatory approach does not match the 
strength of their anti-money laundering laws. For example, the 
EU only bars funding by the military wing of Hamas, not its 
civilian wing, when, in fact, they are all one organization, 
dedicated to terror. Likewise, EU nations do not forbid 
Hezbollah funding at all. Their evidentiary standards also make 
it difficult to block assets. Their financial institutions 
submit a very low number of SAR's and their porous borders 
invite the transit of terrorist funds.
    It must be--as it appears not to be now--a major talking 
point of the President to raise in meetings with foreign 
leaders. If more effort is needed with the EU, then certainly, 
special efforts must be made with countries like Saudi Arabia, 
Pakistan, and the Gulf States, which are the principal sources 
and transit points for terrorist money. Their anti-money 
laundering laws are weak and their follow-up no better. They do 
not deserve the diplomatic pass the Administration seems to 
have given them. If we really want to put sand in the gears of 
al Qaeda, we must press them to cooperate in dealing with the 
phony charities and individuals who support al Qaeda, and to 
come up to international standards on money laundering. We have 
to speak plainly and bluntly, even if privately, in the face of 
such noncooperation.
    Third, we cannot skimp on technical and development 
assistance to help other nations build the technical capacity 
to supervise their financial systems adequately. The 
President's fiscal year 2003 budget allocates only a few 
million dollars to assistance. Far more is necessary.
    Fourth, we need to bring the underground hawala system into 
the Federal regulatory system and simultaneously urge other 
countries to regulate and control them. FinCEN has not been as 
effective as it needs to be to register hawalas. There is no 
coordinated law enforcement plan at the Federal, State, and 
local levels to register and prosecute unregistered hawalas.
    And fifth, we cannot leave the job to others, even to our 
allies. We must not hesitate to employ stronger measures than 
diplomacy when necessary. As you pointed out, Mr. Chairman, the 
Administration has made no use of the authority granted to the 
Treasury by Section 311 of the USA PATRIOT Act to identify 
certain aspects of terrorist financing as ``primary money 
laundering concerns'' requiring special reporting, regulatory, 
or other measures. This would allow sanctions short of a 
Presidential designation under IEEPA, and I urge the 
Administration, as Ken Dam indicated he would like to do, to 
move forward on this.
    These observations reflect a basic premise with which I 
would like to conclude. And that is, dealing with terrorist 
financing requires ``structure, integration, and focus'' both 
within our Government and between our Government and its 
allies. This is true not only with money laundering, but with 
antiterrorism financing as well.
    There has to be a common thread and that thread is working 
against money laundering systems and high-risk problems 
everywhere they occur, coordinated enforcement and regulatory 
activity, leveling the playing field among financial 
institutions so money launderers cannot go to those most weakly 
regulated, and making and keeping money laundering on the 
international agenda.
    Thank you very much.
    Chairman Sarbanes. Thank you for a very helpful statement.
    Ms. Walter.

                 STATEMENT OF ELISSE B. WALTER

                    EXECUTIVE VICE PRESIDENT

                 REGULATORY POLICY AND PROGRAMS

           NATIONAL ASSOCIATION OF SECURITIES DEALERS

    Ms. Walter. Thank you, Mr. Chairman, for the opportunity to 
testify before you today.
    I am here today to tell you about the steps that NASD has 
taken in cooperation with the Securities and Exchange 
Commission, the Treasury Department, and the securities 
industry to begin the implementation of those aspects of the 
USA PATRIOT Act that apply to broker-dealers.
    NASD, as you know, is the self-regulatory organization for 
every one of the roughly 670,000 registered representatives in 
the United States securities industry, and all 5,500 brokerage 
firms that connect investors to the markets.
    Even before the USA PATRIOT Act, we had some experience 
overseeing the securities industry's compliance with anti-money 
laundering regulations. For example, in July 2001, before 
Congress passed the USA PATRIOT Act, NASD Enforcement filed a 
case in which NASD ultimately barred a registered 
representative from the industry for evading Bank Secrecy Act 
reporting requirements.
    In that case, we enforced the Bank Secrecy Act regulations 
under an NASD rule of conduct, which obliges firms and their 
employees ``to observe high standards of commercial honor and 
just and equitable principles of trade.''
    Today, with the advent of the USA PATRIOT Act, a number of 
new anti-money laundering requirements apply directly to the 
securities industry. We have worked very hard over the last 
year to educate broker-dealers and to bring about and monitor 
their compliance with these new requirements.
    For example, NASD has adopted a rule that mirrors the USA 
PATRIOT Act's mandate that all broker-dealers develop and 
implement an anti-money laundering compliance program. We are 
now examining our members to determine whether they are meeting 
that obligation. We have issued four notices to our membership 
to provide guidance and we have conducted educational workshops 
to help firms build their compliance programs.
    Congress wisely made anti-money laundering program 
requirements flexible enough so that each firm can tailor their 
own programs to the firm's size, business activities, and 
customer base. Many smaller securities firms, and they are the 
majority in the industry, did not have the extensive experience 
with anti-money laundering regulations that large, bank-
affiliated firms have had and were uncertain about how aspects 
of the USA PATRIOT Act apply to them.
    To aid these firms, we developed a template to assist them 
in setting up their compliance programs. In addition to giving 
detailed explanations for the rules and how they apply to 
various business relationships and financial products, the 
template contains instructions and links to other useful 
resources. Since being posted on our website in July, this 
template has been consulted by our membership almost 8,000 
times.
    We have also created a search tool that enables securities 
firms to electronically search OFAC's list. Since its launch in 
June, there have been over 17,000 visits to our OFAC search 
tool, which is accessible through our anti-money laundering 
website.
    We have also developed an online training course, which can 
be used to help firms meet their USA PATRIOT Act training 
obligations. As of the end of August, over 6,000 people had 
registered for that course.
    As soon as the statute and rule went into effect, NASD 
began examining and enforcing compliance with the anti-money 
laundering program requirements. Through our examinations, we 
determine whether firms have the required compliance programs 
and assess any deficiencies we find.
    Critical in this effort has been the effective coordination 
among Treasury, the SEC, and the securities SRO's. Throughout, 
Treasury and the SEC have provided us with timely and helpful 
information and critical feedback on our template and the other 
initiatives we have undertaken.
    This continued coordination will remain critical because we 
must continue to provide regulatory consistency and certainty 
in guiding the securities industry because, for this industry, 
this is a time of great change in this aspect among others. 
There are significant issues that still remain concerning how 
this regulatory regime, which traditionally has applied to 
depository institutions, will affect and apply to the 
securities industry, and we look forward to continuing that 
dialogue and that productive relationship.
    I am pleased to have shared with the Committee our part in 
the extensive efforts that have been made to date to ensure 
compliance with the USA PATRIOT Act and, in particular, its 
anti-money laundering provisions.
    NASD is committed to continuing its work with Congress, 
with the Treasury Department, with the SEC, and with other 
regulators on this important initiative, which makes our 
markets stronger and our Nation safer.
    Thank you.
    Chairman Sarbanes. Thank you very much for your statement.
    Mr. James.

                STATEMENT OF ALVIN C. JAMES, JR.

         FORMER SENIOR MONEY LAUNDERING POLICY ADVISOR

                U.S. DEPARTMENT OF THE TREASURY

    Mr. James. Thank you, Mr. Chairman. I am very pleased to be 
given this opportunity to return to your Committee to speak to 
you today about our Government's anti-money laundering programs 
and strategy. I serve as the leader of the Anti-Money 
Laundering Solutions Group at Ernst & Young, LLP. However, the 
views I am expressing here today are my own and do not 
necessarily reflect the views of Ernst & Young.
    Mr. Chairman, I have submitted a statement for the record 
and I would like to summarize and briefly add to those remarks 
today.
    Chairman Sarbanes. The full statements of all of the 
panelists will be included in the record.
    Mr. James. Thank you, Mr. Chairman.
    Chairman Sarbanes. We would appreciate your summarizing.
    Mr. James. Mr. Chairman, our current National Money 
Laundering Strategy is replete with all the right buzzwords--
money laundering systems, interagency cooperation, coordination 
of effort and information sharing. Unfortunately, this strategy 
has failed to enhance our ability to deter systemic money 
laundering. It has failed because at the root of our efforts, 
we cling to prosecution and indictment as our primary tool and 
our primary measure of success in dealing with systemic 
financial crime. We must use all the tools in our tool chest if 
we are to build a solution to this systemic money laundering 
problem.
    The source of this failure to successfully address systemic 
crime lies at a fundamental level. Major money laundering is a 
systemic crime. Systemic crime is brought about by an illicit 
demand within society that is not dependent upon the action of 
any particular individual or group of individuals. Therefore, 
the criminal conduct cannot be effectively deterred by the 
threat of indictment and prosecution, fines, or imprisonment. 
Systemic financial crime is crime that for various reasons will 
always have a new criminal ready to step up when his 
predecessor falls to criminal sanctions. When we fail to 
acknowledge the shortcoming of prosecution as the sole 
deterrent in critical areas, then we also failure to strategize 
toward a more effective means of disruption and elimination of 
the criminal systems that plague our Nation.
    As I continue in my testimony, I will set out several areas 
of systemic abuse of our Nation's financial structure. I will 
also suggest at the end an approach that I believe might 
effectively design and implement a strategy to combat systemic 
crime within our enforcement and regulatory communities.
    The first area of systemic abuse I would like to mention 
centers on correspondent banking. I agree with Senator Grassley 
that this is a very serious area of concern. The USA PATRIOT 
Act began to bring attention to these correspondent 
relationships.
    However, in spite of the actions of the USA PATRIOT Act, 
this network is currently being abused as the primary 
narcotics-currency placement vehicle for the Colombian Black 
Market Peso Exchange.
    Money remitters make up another large category. Numerous 
money remitter systems exist throughout the world. They all 
offer similar services of foreign exchange and small dollar 
money remittance through informal networks based on ethnicity 
and trust. They exist in Asia, Africa, and South America. They 
all have branches in other lands based on the Diasporas of 
their people. Although they serve many useful purposes, by 
their very nature, they are also vulnerable to money 
launderers.
    Yet another system involved the gold broker networks. The 
U.S. Government has taken little notice of the workings of 
these networks within our country or the world. Nonetheless, it 
is possible to transfer millions of dollars of value 
internationally within these amorphous networks with no paper 
trail. The transfers can go from the souks of Dubai, India, and 
the Far East to the brokers of Switzerland and Italy to the 
coin shops of the United States. It is very likely that recent 
transactions of terrorist funds were moved through this 
network. There is a similar international network involving 
diamonds, especially the blood diamonds that have been 
described recently in the press.
    False invoicing is another means of covertly moving funds 
from one country to another that has existed for centuries and 
is well known and well documented. Yet, as with many of the 
others mentioned, it remains almost untouched by U.S. law 
enforcement as a systemic means to launder money.
    In addition, there are remittance companies. These firms 
should be distinguished from money remitters in that they offer 
discreet international transfers of funds for wealthy 
individuals and firms along the lines of the services provided 
for private banking clients within the legitimate financial 
industry. They do so by moving these funds through their 
personal accounts without notice to anyone of the true 
ownership of the funds.
    Finally, hawala and Colombia Black Market Peso are also 
areas of systemic abuse which have been dealt with extensively 
by this Committee. I describe these systems more fully in my 
written testimony. But I will note here that although these 
systems are well known, they continue to be major areas of 
systemic money laundering abuse.
    I offer the following proposal as one means to address 
these problems. A coordinated effort using all of the tools 
available to the Government is the key to disrupting and 
dismantling systemic financial crime. The home agency solely 
responsible for systemic criminal law enforcement and Bank 
Secrecy Act regulatory policy and enforcement is the best means 
to achieve this coordination. I strongly suggest the new agency 
be given the power via a Presidential directive to coordinate 
all investigations impacting systems of financial crime that 
are a threat to our national security. This would be 
investigations outside this agency as well as in. I also 
believe it is essential to see that the new agency has the 
security clearances necessary to coordinate its strategies with 
the intelligence community. Finally, it is vital that this new 
agency include this Nation's private financial sector as a 
partner in designing and implementing overarching strategies 
designed to impact systemic financial crime.
    The problem of overlapping jurisdiction has always been an 
impediment to cooperation and to coordination of the 
investigations related to systemic financial crime. Anti-money 
laundering is necessarily a fragmented jurisdiction due to the 
numerous substantive crimes that generate illicit funds. But 
the recognition of systemic crime gives rise to a logical 
division of effort along the lines of systemic enforcement 
versus individual indictment and prosecution. The agency I 
proposed would be charged with systemic financial 
enforcement and could pass off individual cases to the 
appropriate investigating agency, thus providing an incentive 
for cooperation rather than competition. In addition, the 
performance of the systemic crime agency could be measured 
along the lines of its strategy, which would not directly 
include individual prosecution.
    As an example of the type of coordinated strategy that 
might arise from this agency I propose, let me turn to the area 
I know best--Black Market Peso Exchange. The goal of the 
following strategy would be to force the BMPE money launderer 
and the Colombian drug lord to use processes to launder drug 
money that are less suited to their purpose and thus, easier to 
detect and attack, both by systemic and traditional criminal 
enforcement. First, I propose a coordinated series of 
disruption-oriented undercover operations that could be added 
to the strategic plan. These operations can infiltrate the BMPE 
money laundering organizations and then use their insider 
status just at the right moment to seize or otherwise divert 
the funds that they have been trusted to launder. Then a BSA 
Geographic Targeting Order directed at correspondent banking 
accounts that are funded with substantial currency deposits, 
those mentioned by Senator Grassley earlier this morning, could 
be added to the mix. An international arm could be included 
that would coordinate the impact of intelligence to be shared 
with, say, Colombian or other foreign law enforcement agencies. 
In addition, related individual investigations could be 
coordinated in such a way as to maximize their effect on the 
overall system. And finally, the private sector could be 
included by advising them at the most appropriate moment of the 
overall scheme that we are trying to combat, as well as 
specific countries, foreign banks or particular accounts that 
are known to be involved in the system.
    The overall strategy could be designed to shake the 
confidence of the illicit users of the system. On the one hand, 
they would lose confidence that the money that they launder is 
safe and will be returned to them. On the other hand, the 
appropriate individuals involved could be passed on for 
individual prosecution or investigation, not only to our 
country, but also by their own law enforcement as well if they 
lie outside this country. Those who maintain legitimate 
businesses could find their ability to use the financial 
institutions throughout the world hampered by their link to 
narcotics crime, if they are linked to this process. Providing 
the identity of the known users of the money laundering system 
to the international press could further shame and deter future 
use of the system. The final effect is to eliminate the market 
for Black Market Peso Exchange dollars in foreign exchange. 
Such a coordinated effort as part of an overall strategy to 
attack a system of financial crime could begin to impact the 
system itself, rather than just chip away at the individuals 
involved.
    Mr. Chairman, thank you for allowing me this opportunity to 
express my views. At the least, I hope that my comments will 
foster a continuing debate directed at more effective 
enforcement of systemic financial crime and more efficient use 
of the tools available to our enforcement community.
    Thank you.
    Chairman Sarbanes. Thank you very much, Mr. James.
    We thank all the panelists. You have made some very helpful 
suggestions and very positive contributions.
    We have been joined by Senator Carper. Senator, I will 
yield to you at this point.

              COMMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. I have no questions. I am delighted to see 
our witnesses, and especially welcome Mr. Eizenstat.
    Chairman Sarbanes. Let me try to segment this thing in time 
terms.
    As you heard, as I was talking with Secretary Dam and the 
Deputy Attorney General, it would be our intention to get their 
next strategic plan on time, or close to on time, which is 
February 1.
    We have also pushed them to get the system into place, as 
provided for in the USA PATRIOT Act. The Treasury Department 
still has some rules and regulations to do and so forth. And 
then we would have an opportunity for a thorough examination of 
this early in the new Congress, before a heavy legislative 
agenda intervenes.
    What in the interim, as we approach that thorough and 
comprehensive examination, can the Congress be doing? Or what 
can we do over the next few months to move this effort forward 
before we undertake that review, recognizing that the number of 
legislative days left are extremely limited, so there is not a 
legislative agenda I think that we can pursue over the next few 
months?
    Does anyone have any suggestions in that regard?
    Stu.
    Mr. Eizenstat. Well, quite frankly, I would hope that you 
and Members of the Committee, Senator Carper and others, might 
incorporate some of the recommendations and suggestions that 
you have heard this morning into a letter to Secretary Dam and 
Deputy Attorney General Thompson so that there is a direct 
input from the Committee into their Strategy.
    Having a hearing is very important in terms of 
accountability. But this is a place where specific 
recommendations should be made. For example, as I have 
suggested here, I think that the real key is political will and 
that has to be expressed in a number of ways. First, 
organizationally, that there is no one person in the U.S. 
Government with sufficient clout who can be designated by the 
President to coordinate all the diplomatic law enforcement, 
political, and other activities that are necessary, nor is 
there an international organization to do that.
    FATF does a good job on the money laundering. But there is 
nothing on the terrorist financing side.
    Chairman Sarbanes. Who should that person be? Do you have a 
suggestion in that regard?
    Mr. Eizenstat. I think that this is something that the 
Council on Foreign Relations Task Force will designate. But it 
needs to be somebody that is in the White House and that has 
the ear of the President and can coordinate across departmental 
lines.
    Chairman Sarbanes. When is that Task Force Report coming in 
from the Council?
    Mr. Eizenstat. It will be at the end of October and again, 
I do not want to step on any headlines. They have their own 
recommen-
dations. I am part of that Task Force.
    Chairman Sarbanes. All right.
    Mr. Eizenstat. But I think it will be very concrete. And 
the same with respect to the international institution.
    Second, the Congress can urge that in their Money 
Laundering Strategy, that the Administration commit itself to 
put the issue of money laundering and terrorist financing on 
every major international fora that we participate in--APEC, 
ASEAN, the EU-U.S. summits, and that we press both our close 
allies in the EU and those in the Gulf and the Middle East to 
take this issue more seriously and we have to break some 
diplomatic crockery.
    We simply cannot sit back and say that the Saudis have done 

everything that we have asked them to do, when that simply is 
not the case.
    And third, as you have suggested here, but, again, I think 
concretely, it should be something that Congress and this 
Committee could ask them to include. And that is, not to back 
off FATF designations, to continue to highlight those countries 
which do not come up to international standards in their money 
laundering laws and implementation, and to get on with the 
business, as you suggested, of making these Section 311 
designations.
    So, I think that perhaps a letter from yourself and Members 
of the Committee incorporating some of the thoughts that you 
have heard from Mr. James, myself, and Ms. Walter, might mean 
that the actual Strategy when it comes out is more concrete.
    Chairman Sarbanes. That is very helpful. Does anyone want 
to add to that?
    Mr. James. I would certainly agree with Mr. Eizenstat. I 
think that there is a tendency in the current Strategy and 
current efforts to not see the forest for the trees. And this 
Committee, by letter and comment, can continue to focus 
attention on the overall effect, the impact of this Strategy, 
and what it is doing to prevent terrorist financing, to prevent 
money laundering, to actually move these systems toward 
deterrence.
    Counting the number of prosecutions, and the number of 
cases we have open, all of that is well and good. But if there 
is not some overarching plan to eventually diminish the 
opportunity to have those cases, then I submit we are not 
getting where we need to be. And I think your leadership in 
that regard, Mr. Chairman would be very helpful.
    Chairman Sarbanes. Ms. Walter, are you encountering any 
resistance within the industry to your efforts to bring them up 
to speed on these requirements and so forth? How cooperative 
are people being? Or do they regard it as an imposition that 
has been thrust upon them, which they are reluctantly trying to 
comply with?
    Ms. Walter. I would not say that we are encountering any 
resistance. This has been a period of great change and turmoil, 
not an easy period for the securities industry.
    Given those difficulties, it is to me a tribute to the 
industry that they have stepped up to the plate as well as they 
have, and our initial results of our initial exams are really 
quite encouraging.
    We have found that well over 90 percent of the firms that 
we have examined thus far, and it is about 500, do have their 
compliance programs in place. They have some more work to do. 
We obviously want that figure to be 100 percent and we want all 
aspects of those exams to be up to snuff.
    Chairman Sarbanes. Now are you examining just whether they 
have established a program, or are you also examining how 
thoroughly the program is being implemented?
    Ms. Walter. We are examining both. Obviously, the 
requirement to have the program has only been in place since 
April.
    Chairman Sarbanes. Right.
    Ms. Walter. And the SAR's reporting requirement for most 
broker-dealers has not yet gone into effect. So this will be an 
evolving process.
    But we have also found in our exams that people are 
starting to get better attuned, and this is a new mode of 
analysis particularly for many of our smaller firms, to the 
issues that arise, and we use our examinations as well to point 
out to them areas in which a report would be appropriate, where 
a report has not up till now been required, but will shortly be 
required.
    Chairman Sarbanes. Right.
    Ms. Walter. So both issues are really covered.
    Chairman Sarbanes. Mr. James.
    Mr. James. Mr. Chairman, thank you. I would add that, from 
my perspective, it brought my thought back to your reference 
earlier, I think when you were talking to Mr. Dam about the 
club in the closet.
    Chairman Sarbanes. Right.
    Mr. James. I think that club could be a little bit more 
effective of an incentive if it had--pardon my reference here--
but a little blood on it.
    CEO's have a myriad of compliance issues that they have to 
face and they have just so many dollars to fund them. And 
getting a particular issue past their concern and up to the 
level where they are actually going to spend some money on it 
sometimes takes some incentive.
    Certainly, in my perspective, most companies that I have 
dealt with are very concerned about this issue and very willing 
to deal with it. But they would probably have a little more 
impetus to do so if some of the worst offenders out there were 
brought to heel a little more effectively.
    Chairman Sarbanes. Yes, it really defies common sense to 
think that there aren't transactions or enterprises that could 
not be found to be a primary money laundering concern and then 
bring those sanctions to bear.
    Mr. James. I think a few good examples along those lines 
would help immeasurably.
    Mr. Eizenstat. One of the reasons that we wanted to have 
something like the USA PATRIOT Act was that, prior to that, we 
really were between two extremes. That is, having an IEEPA 
designation, which requires a major Presidential designation. 
It is blocking funds of a foreign government. It is a major 
diplomatic action and problem. Or virtually doing nothing 
except advisories.
    Chairman Sarbanes. Yes.
    Mr. Eizenstat. And the purpose of this was to try to give a 
more flexible set of sanctions short of a Presidential 
designation that can be taken, as you pointed out in your own 
questioning, not just against a government, but against a type 
of transaction or against a particular financial institution as 
well, rather than the government itself. That flexibility 
should be employed. That is the whole purpose of it so, again, 
we were not forced to either do virtually nothing except 
advisories or the nuclear bomb of an IEEPA designation.
    Chairman Sarbanes. Yes, I think that is a very apt 
observation. And it is obviously why we structured it that way 
and it does offer an opportunity, it seems to me, as Mr. James 
said, to send some very important messages. And I think if you 
send out a few of those messages, they are going to have a real 
impact.
    There is a vote underway and so I have to draw this to a 
close. But we very much appreciate your testimony. We probably 
will seek to call on you again in the future and we are most 
grateful to you for your responsiveness and your assistance as 
we examine this problem.
    The hearing is adjourned.
    [Whereupon, at 11:40 a.m., the hearing was adjourned.]
    [Prepared statements and additional materials supplied for 
the record follow:]
             PREPARED STATEMENT OF SENATOR DEBBIE STABENOW
    Thank you, Chairman Sarbanes. I am glad you have called this 
hearing.
    I would also like to welcome our colleague, Senator Grassley, to 
today's hearing. He has been a real leader on the subject of money 
laundering.
    He and I have worked together in encouraging the Administration to 
move promptly in issuing a regulation regarding concentration accounts 
and their potential use as a vehicle for terrorist financing--a subject 
that I hope the Treasury 
Department will update us on today. I look forward to hearing Senator 
Grassley's comments today.
    Combating money laundering in the aftermath of September 11 has 
proven to be particularly critical. We have long seen money laundering 
associated with terrible illegal activities such as drug trafficking. 
These activities pose ongoing serious challenges to our country, but 
now we must also look at the fight against money laundering as one to 
ensure our basic national security.
    Our task since the horrible attacks has not been a simple one. 
However, this Committee acted swiftly and aggressively after the 
attacks to address terrorist financing. I was proud to have been an 
active participant in that debate.
    We now have an opportunity to examine the implementation of the 
International Money Laundering Abatement and Financial Anti-Terrorist 
Act. I am anxious to hear the testimony of our witnesses about the 
promulgation of regulations related to the Act and to hear their 
assessment of how the law is working. I also welcome their insight on 
what Congress can further do to help combat terrorist financing.
    The free movement of money across borders, unnoticed and untracked 
is so critical to the work of terrorists. By acting quickly to cut off 
the supply of money, we limit their ability to act. This is key. As I 
have said in this Committee before, in this new era, economic warfare 
will be one of our strongest weapons against terrorism. Terrorists who 
would destroy our way of life, in an ironic way need our institutions 
to thrive and we will not allow that to happen.
    Thank you again, Mr. Chairman, for calling this hearing today. I 
appreciate your vigilant attention to this matter.
                               ----------
                  PREPARED STATEMENT OF JOHN F. KERRY
             A U.S. Senator from the State of Massachusetts
                            October 3, 2002
    Mr. Chairman, I would like to thank you for the opportunity to 
testify again on the implementation of the anti-money laundering 
provisions included in the USA PATRIOT Act. I know that these anti-
money laundering provisions would not have been included in the law, 
and their implementation would not be as effective, without your hard 
work and dedication.
    The USA PATRIOT Act provides a clear warning to those who have 
assisted or unwittingly assisted those involved in the al Qaeda network 
or other terrorist organizations in laundering money that the United 
States will take whatever actions are necessary to stop those funds 
from entering into the United States. These actions include denying 
foreign banks and jurisdictions access to the U.S. economy, to stop 
terrorists and international criminal networks from laundering money 
into the United States through the international financial system.
    Over the past year, the United States and our allies have made 
important progress to limit the ability of terrorist organizations to 
move money through the international financial system. But we must do 
far more to coordinate and marshal the resources of the Federal 
Government and international organizations to fully implement an 
effective strategy that will end the scourge of money laundering.
    In September, a United Nations report said that despite initial 
successes in locating and freezing $112 million in assets belonging to 
al Qaeda and its associates, al Qaeda continues to have access to 
considerable financial resources. The frozen funds represent only a 
small fraction of the economic resources that many experts believe are 
still available to al Qaeda. The United Nations also reports that funds 
to assist al Qaeda continue to be available from bin Laden's own 
personal inheritances and investments; from funding provided by members 
and supporters of al Qaeda and from contributions from some Islamic 
charitable organizations. The report also states that a large number of 
ostensibly legitimate businesses continue to be maintained and managed 
on behalf of bin Laden in northern Africa, Europe, the Middle East, and 
Asia.
    This report highlights the need for additional steps to increase 
intelligence and information sharing to stop al Qaeda from moving funds 
within the international financial system.
    The USA PATRIOT Act includes legislation, which I sponsored, that 
provides the tools the United States needs to crack down on 
international money laundering havens and protect the integrity of the 
U.S. financial system from the influx of tainted money. The United 
States has the largest and most accessible economic marketplace in the 
world. Foreign financial institutions and jurisdictions must have 
unfettered access to markets to effectively work within the 
international economic systern The Secretary of the Treasury now has 
the authority to leverage the power of our 
markets to force countries or financial institutions to stop 
interacting with known terrorists and those involved with money 
laundering. I am surprised and deeply dismayed that the Bush 
Administration has taken no steps to exercise its authority under this 
law. I believe that the Bush Administration's inaction is especially 
troubling given the current threats the United States faces.
    The USA PATRIOT Act also includes a number of important provisions 
that have begun to seal the cracks in existing law and that provide new 
tools to law enforcement to stop money laundering. First, the law 
requires U.S. financial institutions to use appropriate caution and 
diligence when opening and managing accounts for foreign financial 
institutions. Second, it prohibits foreign shell banks, that have no 
physical location in any country from opening accounts in the United 
States and 
requires our financial institutions to take reasonable steps to ensure 
that foreign banks are not allowing shell banks to use their U.S. 
accounts to gain access to the U.S. financial system. Third, it expands 
the list of money laundering crimes and it assists our law enforcement 
efforts by making it easier to prosecute those crimes. Fourth, it 
requires financial institutions to develop appropriate anti-money 
laundering programs. Finally, it prohibits the use of concentration 
accounts that allow foreign banks to transfer large amounts of cash 
into the United States without including appropriate information on the 
beneficial owner of the funds. As the final regulations for the USA 
PATRIOT Act are developed, it is my hope that the U.S. Department of 
the Treasury will work with the online commerce industry to develop 
appropriate standards for identifying suspicious behavior and to combat 
money laundering which do not unnecessarily invade the privacy of 
American consumers.
    With this new law in place, we must now continue to develop a broad 
strategy both within the Federal Government and in coordination with 
our allies to stop international terrorists from laundering money into 
the United States. As the in-
ternational financial system becomes more adept at stopping money 
laundering, terrorists will become more adept at developing new and 
more sophisticated ways of moving funds internationally. The Federal 
Government must do a better job of integrating and coordinating among 
its investigative, prosecutorial, and regulatory 
resources to combat money laundering. Better information sharing and a 
central coordination point among Federal agencies fighting money 
laundering, as has taken place in efforts to deal with terrorist 
financing, is overdue and will assist in a broad range of efforts.
    Additional funding is needed for many agencies and programs that 
fight money laundering. The Financial Crimes Enforcement Network 
(FinCEN) within the U.S. Department of the Treasury supports the 
investigative efforts of both law enforcement and financial 
institutions to stop domestic and international financial crimes. 
FinCEN deserves additional funding to expand its ability to work with 
financial institutions in the United States to review Suspicious 
Activity Reports (SAR's) that help discover illegitimate banking 
activities. The Electronic Crimes Task Force developed by the U.S. 
Secret Service has been effective in stopping attacks on our critical 
financial infrastructure and has stopped financial fraud. These efforts 
must be continued and expanded with adequate resources. They must also 
be coordinated with the work already being done by the Department of 
Justice, the Federal Bureau of Investigation, and others, to combat 
money laundering.
    I am deeply concerned that terrorists and international criminal 
organizations are hiding money derived from the sale of drugs, weapons, 
and other criminal enterprises, in countries with inadequate tax laws, 
called ``tax havens.'' In many cases, the funds that criminals hide in 
these tax havens have already been laundered in the international 
financial system. To stop criminals from hiding the proceeds of crime, 
I have introduced the Tax Haven and Abusive Tax Shelter Reform Act of 
2002. First, the bill would impose strict measures against nations 
identified as uncooperative tax havens. Second, it would impose strict 
measures against those which use confidentiality rules and practices to 
undermine tax enforcement and administration or refuse to participate 
in effective information exchange agreements. Third, it would limit 
foreign tax credits claimed by taxpayers operating in uncooperative tax 
havens. Finally, it would require a strict reporting of outbound 
transfers by U.S. taxpayers and impose a new civil penalty on U.S. 
taxpayers who fail to report an interest in an offshore account.
    The events of September 11 and the recent United Nations report 
show the need for additional efforts by the United States and its 
allies to limit the ability of international terrorists and others to 
use tax havens to hide the proceeds of their crimes. I remain extremely 
concerned about the Bush Administration's policy to take a unilateral 
approach to the issue of tax havens and to step away from the bilateral 

efforts of the European Union and the Organization of Economic 
Cooperation and Development (OECD) to place appropriate limits on tax 
havens. Contrary to what some claim, the OECD approach does not punish 
countries just for having low tax rates or seek a harmonization of tax 
policy. Instead, the OECD attempts to reduce the number of countries 
whose tax systems have a lack of transparency, a lack of effective 
exchange of information and those that have different tax rules for 
foreign customers than for its own citizens. I believe the Bush 
Administration approach will make it more difficult for the 
international community to track and freeze the assets international 
terrorists like bin Laden and expand upon our recent progress in 
fighting financial crimes.
    Working together, we have achieved a great deal to crack down on 
international money laundering havens and to protect the integrity of 
the U.S. financial system from the influx of tainted money. I look 
forward to working with Chairman Paul Sarbanes and others to ensure 
that the new law is properly implemented to stop international criminal 
and terrorist networks from laundering the financial proceeds of their 
crimes and to stop the use the international financial system to 
develop terrorist networks and fund terrorist actions.
                               ----------
                  PREPARED STATEMENT OF KENNETH W. DAM
           Deputy Secretary, U.S. Department of the Treasury
                            October 3, 2002
    Chairman Sarbanes, Ranking Member Gramm, and distinguished Members 
of the Committee, thank you for inviting me to testify about the 
implementation of the USA PATRIOT Act and the National Money Laundering 
Strategy. In many ways, the National Money Laundering Strategy and the 
USA PATRIOT Act regulations are central to the war on terrorism. I 
applaud the Committee for its work in passing the USA PATRIOT Act and 
its continued interest in the success of the National Money Laundering 
Strategy. I look forward to continuing to work with the Committee as we 
further implement the Act.
    Before reviewing the work we have done to implement the Act and 
discuss the status of the 2002 National Money Laundering Strategy, I 
wish to update the Committee on the progress we are making on the 
financial front of the war on terrorism. Along with my testimony, I am 
submitting a document entitled, ``Contributions by the Department of 
the Treasury to the Financial War on Terrorism.'' This document is 
available on our website at http://www.treas.gov/press/releases/
reports/2002910
184556291211.pdf.
    The President has emphasized that the financial front of the war on 
terror is critically important to America's success in fighting 
terrorism. The President has directed the Secretary of the Treasury and 
the Department, in coordination with other departments of the Federal 
Government and with other nations, fight this front on the war on 
terrorism. As set forth in Goal 2 of the National Money Laundering 
Strategy, the long-term battle against terrorist financing requires a 
multifaceted approach: (1) intelligence gathering; (2) freezing of 
suspect assets; (3) law enforcement actions; (4) diplomatic efforts and 
outreach; (5) smarter regulatory scrutiny; (6) outreach to the 
financial sector; and (7) capacity building for other governments and 
the financial sector. This is an integrated interagency strategy 
because these efforts draw on the expertise and resources of the 
Treasury Department and our sister 
departments and agencies, as well as our foreign partners and the 
private sector.
    As Deputy Secretary of the Treasury, I ensure that this Strategy 
and the Secretary's initiatives draw on the relevant expertise within 
the Department and are implemented across all the components of the 
Department. I also help lead National Security Council deputies 
committee meetings in setting strategic priorities for the financial 
front. Our Under Secretary for Enforcement, Jimmy Gurule, leads our 
enforcement bureaus including the United States Customs Service, the 
United States Secret Service, the Financial Crimes Enforcement Network 
(FinCEN), and the Office of Foreign Assets Control (OFAC) in fighting 
terrorist financing. In addition, Under Secretary Gurule oversees a 
particularly important Treasury initiative, Operation Green Quest--an 
interagency task force that draws upon expertise in the Customs 
Service, the United States Secret Service, the IRS Criminal 
Investigations 
Division (IRS-CI), the Department of Justice, the FBI, and the other 
agencies to investigate terrorist financing. Our Under Secretary for 
International Affairs, John Taylor, works, along with the State 
Department and the Department of Justice, to build and maintain the 
international coalition against terrorist financing. Our Under 
Secretary for Domestic Finance, Peter Fisher, works to help implement 
the USA PATRIOT Act, and to help protect our Nation's critical 
financial infrastructure. And, of course, we have many, many employees 
who are working hard and, in some cases, putting their lives at risk to 
fight the financing of terror. In all of these efforts, we work closely 
with the State Department, the Department of Justice, and other 
departments. This is a team effort and our success depends on it.
Achievements in Financial Aspects of U.S. Anti-Terrorism Initiatives
    Our goal is straightforward. We seek to prevent terrorist attacks 
by: (1) disrup-
ting terrorist finances in the short and the long term; and (2) 
following financial trails to disrupt terrorists themselves. Our 
challenge is to accomplish this without unduly compromising or 
burdening legitimate businesses or our citizens privacy. We expect our 
ability to do this to grow as we learn more about the threat and our 
enforcement and penalty strategies in accordance with this.
    Our first actions after the tragedy of September 11 were to 
identify known terrorists and terrorist entities, freeze their assets 
in the United States, and work with our allies to extend those freezes 
worldwide. Since September 11, the United States and other countries 
have frozen more than $112 million in terrorist-related assets. The 
actual amount of money blocked understates the full effect of the 
blocking action in that our efforts to freeze accounts and fund 
transfers have effectively cut the flow of terrorist money through 
funding pipelines and permanently excluded designees from using the 
formal financial system. For example, we--through OFAC blocking 
actions, law enforcement actions performed by Operation Green Quest and 
the FBI and subsequent prosecutions--we disrupted al Barakat's 
worldwide network that, by some estimates, was channeling $15 to $20 
million dollars a year to al Qaeda. As another example, we froze the 
assets of the Holy Land Foundation for Relief and Development, which, 
as the principal U.S. fundraiser for Hamas, raised over $13 million in 
2000.
    Where warranted, we have also unblocked funds. Three hundred fifty 
million dollars in Afghan government assets that were frozen in 
connection with the Taliban sanctions, mostly before September 11, have 
now been unfrozen for use by the legitimate Afghanistan government.
    We have obtained strong international cooperation in this effort. 
All but a small handful of countries have pledged support for our 
efforts, over 160 countries have blocking orders in force, hundreds of 
accounts worth more than $70 million have been blocked abroad, and 
foreign law enforcement agencies have acted swiftly to shut down 
terrorist financing networks and to seize terrorists' assets. The 
United States has often led these efforts, but there have also been 
important independent and shared initiatives. To cite just four 
examples: On March 11, 2002, the United States and Saudi Arabia jointly 
referred to the U.N. Sanctions Committee two branches of a Saudi-based 
charity; on April 19, 2002, the G7 jointly designated nine individuals 
and one entity; on August 29, 2002, the United States and Italy jointly 
designated twenty-five individuals and entities; and, on September 6, 
2002, the United States and Saudi Arabia jointly referred to the U.N. 
Sanctions Committee Wa'el Hamza Julaidan, an associate of Osama bin 
Laden and a supporter of al Qaeda terror. These efforts have been 
bolstered by actions from the European Union, which has issued three 
lists of designated terrorists and terrorist groups for blocking and by 
Germany, which recently submitted the names of four al Qaeda terrorists 
connected to the September 11 hijackers to the United Nations Sanctions 
Committee. Also, other countries have been taking proactive freezing 
actions and enforcement measures.
    In addition to these efforts, we work with countries daily to get 
more information about their efforts and to ensure their cooperation is 
as deep as it is broad. In many cases, we provide technical assistance 
to countries to help them develop the legal and enforcement 
infrastructure they need to find and freeze terrorist assets.
    We have also had success pursuing international cooperation through 
multilateral forums including the U.N., the G7, APEC, the G20, the 
Financial Action Task Force (FATF), the Egmont Group, and the 
international financial institutions. In particular, Treasury continues 
to play a strong leadership role in FATF, a 31-member organization 
dedicated to the international fight against money laundering. In late 
October 2001, the United States hosted an Extraordinary FATF Plenary 
session, at which FATF adopted eight Special Recommendations on 
Terrorist Financing. These recommendations quickly became the 
international standard on how countries can take steps to avoid having 
their financial systems abused by terrorist financiers. Many non-FATF 
members have committed to implement these recommendations, as well. 
Over 80 non-FATF members have already submitted reports to FATF 
assessing their compliance with these recommendations. We are 
continuing our work within FATF to ensure that member countries fully 
implement the recommendations.
    We are cleaning up the financial environment generally. Hardly a 
week passes without news that a foreign government or bank has taken an 
important new step to crack down on money laundering or terrorist 
financing. For example, according to foreign press accounts, Thailand 
recently announced plans ``to reduce the minimum value of transactions 
subject to scrutiny'' by its anti-money laundering office. As another 
example, the foreign press recently reported that Qatar National Bank 
provided its entire staff with a 4-day course on fighting money 
laundering and terrorist financing. There are scores of similar 
examples involving countries around the globe.
    Governments are also taking steps to prevent charities from being 
abused by terrorists. In the United States, we have designated or 
blocked the assets of several U.S. and foreign charities including the 
Holy Land Foundation, the Afghan Support Committee, and the Pakistan 
and Afghan offices of the Revival of Islamic Heritage Society. We have 
also blocked the financial accounts of the Benevolence International 
Foundation and the Global Relief Foundation pending ongoing 
investigations of these organizations. The international community, 
including FATF, is also focused on this issue because of the threat it 
poses not only to our collective security but also to the sanctity of 
charitable giving. Kuwait and Saudi Arabia have each reportedly 
established new supervisory authorities to better regulate charities. 
This work is very important. Charity is an important component of many 
religions, including Islam, and few acts are as reprehensible as 
misusing charities for terrorist purposes. We seek to ensure a 
regulatory climate in which donors can give to charities without fear 
that their donations will be misused to support terrorism.
    In addition to preventing terrorists from abusing our formal 
financial systems, governments are taking important steps to prevent 
terrorists from abusing informal financial systems, including hawala (a 
centuries-old, trust-based method of moving money that generates little 
paper trail). FATF's Eight Special Recommendations require member 
countries to impose anti-money laundering rules on informal financial 
systems, including hawala dealers. As of December 31, 2001, the United 
States required money service businesses to register, maintain certain 
records, and report suspicious activity. In May 2002, the United Arab 
Emirates hosted an international conference where several countries 
agreed to improve the regulation of hawalas by, among other things, 
implementing the FATF Recommendations against hawalas and designating a 
supervising authority to enforce the rules.
    We have concentrated the world's attention on this problem, and 
these efforts are paying off. We know that al Qaeda and other terrorist 
organizations are suffering financially as a result of our actions. We 
also know that potential donors are being deterred from giving money to 
organizations where they suspect that the money might wind up in the 
hands of terrorists.
    Under leadership from the President, the Congress, and this 
Committee, we are making it increasingly difficult for terrorists to 
use the mainstream financial system. As a result, we believe that 
terrorists increasingly will attempt to finance their operations by 
smuggling bulk cash or other instruments. But smuggling is costly. It 
takes time. It is uncertain. Smuggling exposes the cash or other 
instruments to possible detection and seizure by the authorities. 
Indeed, since September 11, our Customs Service has seized over $11 
million in cash being smuggled out of the United States to Middle 
Eastern destinations or with some other Middle Eastern connection. By 
making bulk cash smuggling a crime, the USA PATRIOT Act helped make 
these increased seizures possible.
    Smuggling also exposes couriers to possible capture. This summer, 
Customs, United States Secret Service, and FBI agents apprehended and 
subsequently indicted Jordanian-born Omar Shishani in Detroit for 
smuggling $12 million in forged cashier's checks into the United 
States. The detention and arrest of Shishani are highly significant as 
they resulted from the Customs Service's cross-indexing of various 
databases, including information obtained by the U.S. military in 
Afghanistan. That information was entered into Customs' ``watch list,'' 
which, when cross-checked against inbound flight manifests, identified 
Shishani.
    While we have had important successes, I must tell you that we have 
much to do. Although we believe we have had a considerable impact on al 
Qaeda's finances, we also believe that al Qaeda's financial needs are 
greatly reduced. They no longer bear the expenses of supporting the 
Taliban government or of running training camps, for example. As I have 
cautioned before, we have no reason to believe that al Qaeda does not 
have the financing it needs to conduct additional attacks.
2002 National Money Laundering Strategy
    Although terrorist financing is a key component of our Anti-Money 
Laundering Strategy, our fight against money laundering goes well 
beyond terrorist financing issues. And just as we have made great 
strides in the war against terrorist financing, the Administration's 
more general fight against money laundering--domestically and 
internationally--has achieved tremendous progress.
    We are making solid progress on our more traditional money 
laundering case investigations. For the first time, the 2002 Strategy 
reports on some of the significant money laundering cases that the 
Federal Government has investigated and prosecuted in the last year. 
For example, earlier this year, Customs agents in New Jersey arrested 
an Assistant Vice President of a bank who was operating an illegal 
money transmitting business that moved approximately a half billion 
dollars in 8 months. The Assistant Vice President maintained over 250 
accounts at the bank, 44 of which were in the names of nonexistent 
companies and people that were fronts for currency exchange firms in 
Brazil. Customs received substantial assistance from IRS-CI and DEA in 
the case, which is now being prosecuted by the U.S. Attorney's Office 
in Newark.
    In 2001, law enforcement agents of the Departments of Treasury and 
Justice seized over $1 billion in criminal funds--about 38 percent of 
which was related to money laundering investigations. The Departments 
forfeited over $241 million in criminal assets in fiscal year 2001 
relating to money laundering.
    But much remains to be done. The vision for how we, as a 
Government, will accomplish this mission and what we, as a Government, 
hope to accomplish is laid out in the annual National Money Laundering 
Strategy.
    Congress directed the President, acting through the Secretary of 
the Treasury, in consultation with the Department of Justice and a 
number of other agencies, to develop a national strategy for combating 
money laundering and related financial crimes in the Money Laundering 
and Financial Crimes Strategy Act of 1998. On behalf of the President 
and his Administration, this Department was proud to release the 2002 
National Money Laundering Strategy, which reflects the views, 
contributions, and consensus of 26 different Federal agencies, in July 
of this year. I am delighted to appear before you today to discuss the 
2002 Strategy. The 2002 Strategy describes our multiyear effort to 
safeguard the integrity of the world's financial system and to reduce 
the vulnerability of the U.S. financial institutions to criminal 
activities. I am especially proud of our efforts to implement the anti-
money laundering provisions of the USA PATRIOT Act, which has become a 
cornerstone of U.S. anti-money laundering efforts, and I will expand 
upon those efforts in a moment.
    The 2002 Strategy is precedent setting. It lays out, for the first 
time, the comprehensive national strategy to attack the financing of 
terrorist groups, which I have described above. It sets another 
important precedent too, a precedent about 
accountability, and we have the leadership of Secretary O'Neill to 
thank for this.
    The 2002 Strategy also reflects two themes that have driven this 
Administration's approach to money laundering enforcement since its 
first day in office: (1) the need for interagency coordination and 
cooperation in conducting anti-money laundering policy; and (2) the 
need to ensure that the information that the financial institutions are 
required to report is useful, and can be used effectively by the 
Government.
Effective Interagency Coordination
    First, coordination. As I have already noted, 26 distinct agencies 
participated in the drafting of the Strategy and all 26 are necessary 
to the successful execution of the Strategy. We rely on many of these 
same agencies to lend their experience and expertise in drafting 
regulations to implement the USA PATRIOT Act.
    We have learned through experience that it is only by working 
cooperatively that we will be able to cut off the lifeblood that 
criminals and terrorists rely on to finance their illegal acts. It is 
vitally important to cooperate and coordinate on an interagency basis 
to investigate priority targets whenever it is possible to do so.
    The notion of interagency cooperation is not new. And it is not new 
in the specific area of anti-money laundering investigations. In the 
Money Laundering and Financial Crimes Strategy Act of 1998, Congress 
directed the Secretary, in consultation with the Attorney General, to 
designate High-Risk Money Laundering and Related Financial Crime Areas 
or HIFCA's. HIFCA's can be established to focus on money laundering in 
an industry, sector, or group of financial institutions.
    These HIFCA Task Forces are intended to improve the quality of 
Federal money laundering investigations by concentrating the money 
laundering investigative 
expertise of the participating Federal and State agencies in a unified 
task force. HIFCA's are supposed to leverage the resources of the 
participants and create investigative synergies. Thus, interagency 
coordination on money laundering investigations takes place every 
single day in HIFCA areas, and the six existing HIFCA Task Forces 
initiated over 100 investigations during 2001.
    Perhaps the most important of these HIFCA cases was Operation Wire 
Cutter. Wire Cutter was a multiyear investigation where the U.S. 
Customs Service and the Drug Enforcement Administration (DEA) teamed 
with Colombia's Departamento Administrativo de Seguridad to arrest 37 
individuals as part of an undercover investigation of Colombian peso 
brokers and their money laundering organizations. Investigators seized 
over $8 million in cash, 400 kilos of cocaine, 100 kilos of marijuana, 
6.5 kilos of heroin, nine firearms, and six vehicles.
    I should also note the long-standing ``El Dorado'' Task Force, 
which is led by U.S. Customs and IRS in New York and is also a High 
Intensity Drug Trafficking Area (HIDTA) initiative. Comprised of 185 
individuals from 29 Federal, State, and local agencies, the ``El 
Dorado'' Task Force is one of the Nation's largest and most successful 
financial crimes task forces, having seized $425 million and arrested 
1,500 individuals since its inception in 1992.
    However, we recognize that it is not enough simply to create 
HIFCA's or celebrate the success of isolated cases. A number of 
obstacles still remain before the mission of all the HIFCA's can be 
fully realized. For example, the Federal law enforcement agencies have 
provided different levels of commitment and staffing to the Task 
Forces. Few of the HIFCA's have succeeded in integrating non-law 
enforcement personnel into their work.
    We have been candid about the difficulties some of the HIFCA's have 
experienced, and we discussed them in Goal 3 of the 2002 Strategy along 
with our plan to determine how to improve the functioning of the 
HIFCA's. During this year, the Departments of Treasury and Justice are 
reviewing what has worked and what has not since the initial 
designation of the HIFCA's, and will seek to implement appropriate 
changes through the work of an interagency HIFCA review team.
    The 2002 Strategy presents a concrete plan and a vision for further 
improving interagency coordination on law enforcement investigations. 
The Strategy calls on the Treasury and Justice to co-lead an 
interagency effort to identify potential money laundering-related 
targets, and then deploy the necessary assets to attack those agreed 
upon targets. Those efforts are well under way and I am very pleased 
with the progress the interagency group has made in a short period of 
time.
Effective Use of Reported Information
    Next, the Strategy focuses on ensuring that we are making effective 
use of information that financial institutions are required to report 
to the Government. Both inside and outside of Congress some have 
wondered whether the information reported by financial institutions, 
especially the Suspicious Activity Reports (SAR's), makes any 
difference and whether any one in law enforcement reviews them. The 
answer to both questions is an unequivocal YES.
    Federal law enforcement agents, often together with their Federal 
and State financial regulatory colleagues and State law enforcement 
colleagues, currently download and review over 15,000 SAR's every 
month. Each SAR filed is reviewed in the field, often by more than one 
agency. Obviously, given restraints on resources and the number of 
hours in the day, we have to make educated decisions about which SAR's 
merit further investigation, and then proceed accordingly.
    The 2002 Strategy strongly supports the creation and development of 
interagency SAR Review Teams. Goal 3, Objective 1, Priority 3 
specifically addresses the creation of five additional SAR Review Teams 
in the U.S. Attorney Offices that do not currently have or support a 
SAR Review Team, but would benefit from having one. Several HIFCA Task 
Forces, such as San Juan, Los Angeles, New York, and Chicago, have also 
successfully integrated their SAR Review efforts into the work of their 
HIFCA Task Forces.
    Let me give you a few examples of how SAR's have been used in some 
high-profile cases and in recent criminal investigations.

 A SAR filed in August 1998, by Republic National Bank reported 
    a series of suspicious transfers of large sums of money from a 
    Russian bank correspondent 
    account to accounts in the Bank of New York. Federal authorities 
    began an investigation of Peter Berlin and his wife, Ludmila 
    Edwards, a BONY Account Executive. Seizure warrants were executed 
    against the BONY accounts and several other Berlin entities, as 
    well as the correspondent account for a Russian bank at the Bank of 
    New York, and resulted in seizures totaling $21,631,714 from 11 
    different accounts. Berlin and his wife pled guilty to conspiracy, 
    money laundering, and conducting an illegal money transmittal 
    business, and agreed to criminal forfeitures totaling approximately 
    $8.1 million.
 In January 2001, Citibank Miami filed a Suspicious Activity 
    Report (SAR) concerning the deposit of approximately $15 million 
    from an individual whom law enforcement determined to be the 
    ``bagman'' for Vladimiro Lenin Montesinos-Torres, the former Chief 
    of the Peruvian National Intelligence Service (SIN). Montesinos was 
    under investigation in Peru for fleeing with government funds, 
    trafficking in narcotics, and violating human rights. Intelligence 
    information revealed that Montesinos had maintained a global 
    network of bank accounts and front companies to move and to hide 
    hundreds of millions of dollars received from drug traffickers, 
    defense contract kickbacks, embezzlement of public funds, and gun-
    running since the mid-1990's. This money was deposited into banks 
    located in Peru, Switzerland, the Cayman Islands, Panama, and the 
    United States. Following the bagman's arrest, Montesinos attempted 
    to extort U.S. bank officials to release about $38 million seized 
    in connection with the investigation. This effort backfired when 
    Montesinos associate was arrested in Miami and cooperated with the 
    FBI, providing them with the location of Montesinos hiding place. 
    Over $22 million has been seized in the United States for 
    forfeiture related to this investigation.
 In May of this year, as a result of several SAR's filed by 
    different financial institutions, three principals and the former 
    treasurer of a group of metal trading companies were charged with 
    conspiracy to commit bank fraud, mail fraud, and wire fraud in 
    connection with a sophisticated international scheme to defraud 
    banks worldwide of more than $600 million.
 In April of this year, information learned from an interagency 
    investigation generated by SAR's led to the successful prosecution 
    of a man for operating an illegal money transmitting system. From 
    September 5, 2000 through November 2001, the defendant operated the 
    money transmitter without the license required by the State, 
    despite notice from the State supervisory agency that this was 
    criminal conduct. During this period, the defendant transmitted 
    $2.8 million to the UAE. The money transmitter in this case is one 
    of a number of outlets of a money transmitter system that had its 
    assets frozen by OFAC.
 Another SAR filing led to the investigation, arrest, and 
    guilty plea in February of this year of three brothers who pled 
    guilty to fraudulently selling food stamps out of their convenience 
    store. The scam netted nearly $2 million. The brothers wire 
    transferred several hundred thousand dollars to foreign nationals 
    in the Middle East, and these transactions are still under 
    investigation by Federal agents.

    SAR's have also been used to aid investigations of terrorist 
financing. In the 6 month period following the September 11 attack, 255 
financial institutions filed over 1,600 SAR's concerning potential 
terrorist financing activity, with violation amounts ranging up to $300 
million. FinCEN continues to support law enforcement efforts in 
tracking terrorist financing.
Implementation of the USA PATRIOT Act
    As I have just stated, the importance of the SAR's is, of course, 
interrelated with our work in implementing the many provisions of the 
USA PATRIOT Act. Goal 4 of the Strategy focuses on our work on the USA 
PATRIOT Act and our related goal to ensure that these regulations are 
meaningful and useful to law enforcement. In that vein, I wish to turn 
now to an update on Treasury's implementation of the money laundering 
and antiterrorism provisions of Title III of the USA PATRIOT Act. We 
have devoted ourselves at the highest levels of Treasury to carrying 
out the tasks that this Committee and Congress have placed on our 
shoulders to improve and to fortify our anti-money laundering and 
antiterrorist financing regime. The provisions of the Act, and now our 
regulations, take aim at areas in which our financial services sector 
may be vulnerable to abuse. As the principal architect of these new 
regulations, Treasury is mindful of the need to craft rules that 
achieve the goals of the Act without unduly burdening legitimate 
business activities or our citizens' privacy.
    Any discussion of Treasury's implementation of the USA PATRIOT Act 
would be incomplete without recognition of the assistance provided by 
the Federal banking agencies, the Securities and Exchange Commission, 
the Commodity Futures Trading Commission, and the Department of 
Justice. These agencies have lent their time and expertise for the 
common goal of protecting our financial system through intelligent 
regulations. Active participation by the financial services industry 
that will operate under our regulations, has also been essential.
    Our major accomplishments over the past 11 months include:

 Together with the Federal functional regulators, issuing 
    proposed customer identification and verification regulations.
 Developing a proposed rule to that seeks to minimize risks 
    presented by the correspondent banking and private banking 
    accounts.
 Expanding our basic anti-money laundering program requirement 
    to the major 
    financial services sectors, including insurance and unregistered 
    investment companies, such as hedge funds.
 Developing rules to permit and facilitate the sharing of 
    information between law enforcement and financial institutions, as 
    well as among financial institutions themselves.

    Of course, each of these accomplishments emanated from the very 
legislation that this Committee was instrumental in drafting.
Ensuring Appropriate Customer Identification and Verification of 
        Identification
    In July, Treasury and the Federal functional regulators, jointly 
issued proposed rules requiring certain financial institutions to 
develop identification and verifi-
cation procedures that enable them to form a reasonable belief as to 
the identity of the customer. The proposed rules apply to banking 
institutions, securities brokers and dealers, mutual funds, futures 
commission merchants, and futures introducing brokers. Just as this 
Committee envisioned, the proposed rules seek to make mandatory what 
many financial institutions are already doing--obtaining basic 
identifying information from customers at the time of account opening. 
However, the rules also maintain sufficient flexibility so as to 
accommodate advancing technology and the wide range of channels through 
which financial services are offered by these institutions, including 
opening accounts via the Internet. Obtaining certain information is 
mandatory, but the manner in which that information is obtained and 
verified is appropriately left to the discretion and judgment of each 
particular financial institution. We are continuing our work on 
drafting similar regulations for the remaining types of financial 
institutions that maintain accounts for customers.
    From the outset, we recognized the potential benefits to a 
financial institution's identification program if it were able to 
reliably confirm that the customer's name matched the Social Security 
number provided at the time of account opening. The most reliable 
source for this information is, of course, the Social Security 
Administration. This spring, we reached an agreement in principle with 
the Social Security Administration to permit financial institutions to 
verify with the Social Security Administration the authenticity of the 
Social Security numbers provided by accountholders. We are continuing 
to work out the logistical details and hope to have this service 
available in the near future. However, I caution that verifying the 
authenticity of a Social Security number does not ensure that the 
person who provided the information is, in fact, that person.
Eliminating Risks Associated with Correspondent Banking Activities of
Foreign Banks and Other Foreign Financial Institutions
    Several important provisions of the USA PATRIOT Act take aim at 
systematically eliminating the risks that can exist when U.S. financial 
institutions offer correspon-
dent accounts to foreign banks and other foreign financial 
institutions. Given their breadth and international focus, these 
provisions are some of the more significant ones in the Act.
    One month after the Act became law, we issued interim guidance to 
financial 
institutions describing how they were to comply with two key 
provisions--the prohibition on maintaining correspondent accounts for 
foreign shell banks (Section 313), as well as the recordkeeping 
provisions for foreign banks having correspondent accounts (Section 
319(b)). A proposed rule followed shortly thereafter. Having thoroughly 
reviewed public comments received and analyzed the issues presented, we 
issued on September 18 a final rule implementing both provisions.
    In the final rule, we have defined ``correspondent account'' to 
reflect the objectives of different provisions of the Act, as well as 
comments received from the private sector. With respect to the shell 
bank prohibition, for example, we have construed the term 
``correspondent account'' broadly to reflect the intent of Congress to 
cut off 
unregulated ``brass plate banks'' from the U.S. financial system. 
Similarly, we determined that a broad definition of ``correspondent 
account'' was appropriate for the recordkeeping provisions of Section 
319(b). These recordkeeping provisions apply to correspondent accounts 
maintained by any foreign bank, regardless of the jurisdiction in which 
the foreign bank is licensed. Obtaining the basic information required 
by this Section from all foreign banks, namely, the names of the owners 
of the foreign bank and the name of a U.S. agent for service of 
process, serves a valuable law enforcement purpose and will assist U.S. 
banks and securities brokers with their anti-money laundering efforts. 
Further, Section 319(b) also contains an im-
portant provision authorizing both the Secretary of the Treasury and 
the Attorney General to serve administrative subpoenas on any foreign 
banks with correspondent accounts in the United States. Any limitation 
on the definition of a correspondent 
account in this Section would unduly limit this subpoena power.
    Treasury has also issued a proposed rule that aggressively 
implements Section 312 of the Act, a provision that takes aim at a wide 
array of money laundering risks associated with correspondent accounts 
maintained for foreign financial institutions in the United States. 
Additionally, both the statute and Treasury's proposed rule seek to 
curb potential abuses in connection with private banking accounts for 
foreign persons by requiring due diligence, including obtaining 
information on the true ownership and source of funds placed in such 
accounts. Recent events have demonstrated the risks posed by well-
intentioned financial service professionals seeking to court and 
maintain wealthy foreign clients. This rule is designed to minimize 
those risks. Treasury's rule also includes important safeguards to 
prevent the proceeds of foreign official corruption from finding a home 
in the U.S. financial system.
    After issuing this proposed rule, Treasury received extensive 
comments from the affected industries. While many of the issues raised 
will take time to analyze, Section 312 became effective on July 23. 
Accordingly, on that date we issued an interim rule that effectively 
tolled the application of this provision pending our issuance of a 
final rule for most financial institutions. However, because of the 
importance of this provision in protecting the financial system, we 
required certain financial institutions, such as banks and securities 
and futures brokers, to begin conducting the type of due diligence that 
will eventually be incorporated into the final rule.
Expanding the Anti-Money Laundering Regime to All Facets of the
U.S. Financial System
    A basic tenet of our anti-money laundering regime is that tainted 
funds will follow the path of least resistance to enter the legitimate 
financial system. Therefore, a comprehensive approach to minimizing 
money laundering and terrorist financing risks within the Nation 
necessarily involves extending controls to the full range of financial 
services industries that may be susceptible to abuse. Section 352 of 
the Act embodies this approach by directing Treasury to expand the 
basic anti-money laundering program requirement to all financial 
institutions presenting risks of money laundering by virtue of the 
products or services offered. The challenge is to take the broad 
statutory mandate and translate that into rules applicable to each of 
the 
diverse industries defined as financial institutions under the Bank 
Secrecy Act.
    In April, Treasury, with the assistance of the SEC, the CFTC, their 
respective self-regulatory organizations, and the banking regulators, 
issued regulations requiring firms in the major financial sectors to 
establish an anti-money laundering program. In addition to the banks, 
which already had an anti-money laundering program requirement, we 
covered securities brokers and dealers, futures commission merchants 
and introducing brokers, mutual funds, money services businesses, and 
operators of credit card systems. Separate rules applicable to each 
financial industry were drafted to ensure that the programs would be 
appropriately tailored to the risks posed by their operations. With the 
pledge that we would work diligently to complete our task, the 
Secretary exercised his discretion and allocated additional time for us 
to study the remaining industry sectors and craft regulations.
    Since that time, we have studied the business operations of the 
remaining financial industries in order to take banking oriented 
regulations and modify them to apply to these other industries. Members 
of the remaining financial industries have never been subject to 
comprehensive Federal regulation of their relationships with customers, 
let alone anti-money laundering regulation. Additionally, the remaining 
categories of financial industries encompass a broad range of 
businesses, from sole proprietorships to large corporations, further 
complicating the process of drafting a regulation that does not impose 
an unreasonable regulatory burden. Following months of meetings with 
industry groups and representatives, we have virtually completed our 
research and are working now on the task of drafting the regulations.
    We recently issued proposed rules that would require firms in 
certain segments of the insurance industry and certain investment 
companies (namely, those not registered with the Securities and 
Exchange Commission) to establish anti-money laundering programs. These 
two rules reflect the complexities of our task. For the insurance 
industry, after tapping the expertise of the State insurance regulators 
and both domestic and international law enforcement officials, we 
tailored the rule to those areas of the industry where the products 
offered are particularly susceptible to money laundering abuse and 
instances of money laundering have been documented. This is primarily 
the life and annuity products. Also while the insurance agent must play 
a vital role in any comprehensive anti-money laundering program, we 
expressly left the obligation on the insurance company to set up and 
assure implementation of the program. Upon the establishment of an 
effective program, the insurance company can delegate responsibilities 
to the agents as appropriate. With respect to investment companies, 
such as hedge funds, that are not registered with the SEC, with the 
expert guidance and assistance of the SEC and the CFTC, we specifically 
targeted collective investment vehicles with characteristics that make 
them susceptible to money laundering. Those vehicles investing in 
securities, commodity futures, or real estate fall within the rule. 
Furthermore, to facilitate effective regulation, we are proposing to 
require investment companies covered by the rule to file a notice with 
FinCEN identifying themselves, their principal investments, and contact 
information. Such a notice is crucial given that many such vehicles 
often have offshore operations despite their marketing to U.S. 
investors.
    Another important component of an effective anti-money laundering 
regime is ensuring that financial institutions report suspicious 
activity to FinCEN promptly. With the able assistance of the SEC and 
the Federal Reserve, we have successfully completed a final suspicious 
activity reporting rule for securities brokers and dealers, ensuring 
that firms in this critical financial sector have a mechanism in place 
for reporting suspicious activities. Similarly, we are working with the 
CFTC to complete a proposed rule that would require the futures 
industry to file suspicious activity reports, and we are working with 
the SEC on a rule requiring mutual funds to file suspicious activity 
reports. And, although not required by the Act, we recently issued a 
final rule requiring casinos to file suspicious activity reports. 
Beyond these financial institutions, we are considering whether 
reporting obligations should be imposed on additional financial sectors 
such as the insurance industry. As we gain more experience with the 
various financial sectors, we will be able to make an 
informed judgment as to the efficacy of imposing reporting 
requirements.
Facilitating the Sharing of Critical Information Relating to Money 
        Laundering
and Terrorist Financing
    Early in the implementation process, I emphasized that one of the 
principles that guides Treasury's implementation of Title III is 
honoring a central purpose of the Act to enhance coordination and 
information flow. To that end, we have issued a final rule pursuant to 
Section 314(a) seeking to establish FinCEN as an information conduit 
between law enforcement and financial institutions to facilitate the 
sharing and the dissemination of information relating to suspected 
terrorists and money launderers. The system builds upon FinCEN's 
ongoing relationships with law enforcement, the regulators, and the 
financial community. We have also pledged to work going forward to 
provide the financial sector with additional information, such as 
typologies of money laundering or terrorist financing schemes and 
updates on the latest criminal trends.
    Since March of this year, Treasury has authorized certain financial 
institutions to share information among themselves concerning those 
suspected of terrorism or money laundering pursuant to Section 314(b) 
of the Act. Our final rule retains the central features of the prior 
rule, but we have expanded the scope of financial institutions eligible 
to share information under this provision. Also, as required by the 
statute, financial institutions must provide FinCEN with a yearly 
notice that they will be taking advantage of this provision to share 
information.
    Further facilitating the sharing of information is FinCEN's 
establishment of the USA PATRIOT Act Communication System (PACS). PACS 
is designed to allow participating financial institutions to quickly 
and securely file BSA reports over the Internet. This e-filing will 
expedite reporting the process, make the information available to law 
enforcement more rapidly, and reduce the costs for financial 
institutions in complying with the filing of BSA reports. FinCEN has 
completed a successful beta test in which twenty-six major financial 
institutions volunteered to file their BSA reports using this system. 
They have also begun offering this optional filing method to financial 
institutions generally.
Conclusion
    In summary, we have made substantial progress in the global fight 
against money laundering, through our coordinated efforts, including 
our work in terrorist financing and the National Money Laundering 
Strategy and our implementation of the USA PATRIOT Act. The Act is 
making a difference. Recently, USA Today reported the results of a 
survey of over 2,000 financial professionals. Sixty-nine percent of 
them agreed that the USA PATRIOT Act will prevent terrorist access to 
the U.S. financial system. They are right. We believe that the Act is 
making it increasingly difficult for terrorists to use the U.S. 
financial system. We are disrupting their 
ability to plan, operate, and execute attacks. And we are forcing them 
to resort to methods, such as bulk cash smuggling, that expose them to 
a greater risk of detection and capture.
    Of course, we still have much more work to do, and this important 
work must continue once the new Department of Homeland Security has 
been created. Regardless of the final structure of the new Department, 
Treasury will continue playing a pivotal role.
    For example, our regulatory and oversight responsibilities for the 
USA PATRIOT Act and Bank Secrecy Act will continue. We are hard at work 
on developing additional implementing regulations, and I have testified 
repeatedly that the work does not stop once the regulations have been 
released. Time and experience will allow reasoned reflection on the 
decisions we have made, and it is incumbent upon the Treasury to make 
adjustments to these rules when it is necessary to ensure that they 
continue to achieve our goals.
    To that end, I announced the creation of a new task force within 
the Treasury, the Treasury/USA PATRIOT Act Task Force. This task force 
will work with other financial regulators, the regulated community, law 
enforcement, and consumers to improve the regulations that we have 
issued in light of the experience we gain through implementation.
    Even after the creation of the new Department, Treasury will 
continue to participate in analyzing and investigating the information 
reported by financial institutions. IRS-Criminal Investigation will 
maintain its leadership of the interagency SAR Review Teams that I 
discussed earlier in my testimony. Again, these SAR Review Teams 
currently review over 15,000 SAR's each month. IRS-CI has established 
41 SAR Review Teams across the country and will continue to devote 
substantial resources to this effort.
    OFAC, of course, will continue its role in administering targeted 
financial sanctions. FinCEN will also remain at work in developing new 
analytical tools to find patterns in the data provided by the financial 
institutions. In addition to its traditional role of supporting law 
enforcement agencies on specific investigations, FinCEN has begun to 
develop proactive leads to send to the field for investigation. FinCEN 
will continue these efforts and continue to send the necessary 
information to the appropriate law enforcement agencies, wherever they 
hang their hats at the end of the day.
    We look forward to working with the new Department and the 
Committee on our continued work toward our common goal.
          CONTRIBUTIONS BY THE U.S. DEPARTMENT OF THE TREASURY
                   TO THE FINANCIAL WAR ON TERRORISM
                               FACT SHEET
                    U.S. Department of the Treasury
                             September 2002
    ``This morning, a major thrust of our war on terrorism began with 
the stroke of a pen. Today, we have launched a strike on the financial 
foundation of the global terror network . . . we will direct every 
resource at our command to win the war against terrorists: every means 
of diplomacy, every tool of intelligence, every instrument of law 
enforcement, every financial influence. We will starve the terrorists 
of funding, turn them against each other, rout them out of their safe 
hiding places and bring them to justice.''

        President George W. Bush
        September 24, 2001
        Announcing Executive Order 13224

    ``If you have any involvement in the financing of the al Qaeda 
organization, you have two choices: cooperate in this fight, or we will 
freeze your U.S. assets; we will punish you for providing the resources 
that make these evil acts possible. We will succeed in starving the 
terrorists of funding and shutting down the institutions that support 
or facilitate terrorism.''

        Treasury Secretary Paul O'Neill
        September 24, 2001
                           Table of Contents
1. Executive Summary
    The challenge, objective, approach and actions the United States 
has taken, and the results of those actions.
2. Executive Order 13224
    The Order expands the United States' power to target the support 
structure of terrorist organizations, freeze the U.S. assets and block 
the U.S. transactions of terrorists and those that support them, and 
increases our ability to block U.S. assets of, and deny access to U.S. 
markets to, foreign banks who refuse to cooperate with U.S. authorities 
to identify and freeze terrorist assets abroad.
3. USA PATRIOT Act
    This legislation, signed into law by President Bush on October 26, 
2001 contained new tools to enhance our ability to combat the financing 
of terrorism and money laundering.
4. Charities
    Charities across the Nation do important work, making a difference 
in the lives of millions of people. Americans and others around the 
world donate hundreds of billions to charity, with humanitarian intent. 
They deserve to know that protections are in place to assure that their 
contributions do good work. Unfortunately, some charities have been 
abused by those who finance terror, through schemes to siphon money 
away from humanitarian purposes and funnel it to terrorism.
5. Hawalas
    The word ``hawala,'' meaning ``trust'' refers to informal money or 
value transfer systems or networks outside the formal financial sector. 
Hawala provides a fast and cost-effective method for worldwide 
remittance of money or value, particularly for persons who may not have 
access to the financial sector. Due to the lack of transparency in 
hawala and other alternative remittance systems, there is substantial 
potential for abuse.
6. International Efforts
    Numerous multilateral groups, such as the G7, the FATF, and the 
Egmont group, have marshaled their resources to join the United States 
to combat terrorist financing.
7. Domestic Law Enforcement Efforts
    Domestic law enforcement agencies--many within the U.S. Treasury--
have mobilized to identify terrorists networks and starve terrorists of 
money.
Executive Summary
    One year ago, terrorists struck our Nation with unforeseen guile 
and unprecedented consequences--unprecedented consequence for Americans 
and our way of life. In turn we have taken unprecedented actions to 
dismantle terrorist networks. Under the leadership of President Bush, 
Americans have rallied to the war on terror, and we have struck back on 
every front: military, political, and financial, even as we have 
strengthened our homeland defenses against future attacks.
    The Department of the Treasury--in coordination with the 
Departments of Justice and State--leads an interagency effort to 
disrupt and dismantle terrorist financing.\1\ No less than the military 
campaign, the financial war has required careful planning, domestic and 
international coalition-building, and decisive execution. And as with 
the military campaign, we have achieved results.
---------------------------------------------------------------------------
    \1\ This fact sheet highlights the Treasury Department's efforts 
against terrorist financing over the past 12 months since September 11, 
2001. This is not intended to document all United States Government 
activity on the financial front on the war on terrorism. The activities 
of other areas within the U.S. Government--specifically the 
intelligence community, the military community, the diplomatic 
community, and the non-Treasury law enforcement community--are not 
detailed here.
---------------------------------------------------------------------------
    As a necessary first step in leading the financial war against 
terrorism, we have developed and published a comprehensive strategy to 
identify, disrupt, and dismantle terrorist financing networks. This 
strategy is three-fold. First, we are applying technology, 
intelligence, investigation, and regulations to locate and freeze the 
assets of terrorists, wherever they may hide. New powers granted by the 
President and Congress have enabled us to scour the world financial 
system for suspicious 
activities with greater precision than ever before.
    Second, we are attacking terrorist financial infrastructures--their 
formal and underground methods for transferring funds across borders 
and between cells, whether through banks, businesses, hawalas, 
subverted charities, or innumerable other means. Our approach is to 
deny terrorists access to the world's formal financial infrastructure 
and use the money trail to locate and apprehend terrorists.
    Third, we are using diplomatic resources and regional and 
multilateral engagements to ensure international cooperation, 
collaboration, and capability in dismantling terrorist financing 
networks.
    The war on terrorist financing is an immense undertaking. The 
openness of our modern financial system, which allows savers and 
investors to fuel economic growth, also creates opportunities for 
terrorist parasites to hide in the shadows. Our challenge in this front 
of the war is to protect the freedom and flexibility the world's 
financial systems while driving our enemies into the sunlight, where we 
and our 
allies can sweep them up. We have enjoyed success, but much more 
remains to be done.
    The United States took six principal steps in the fall of 2001 to 
pursue financial underwriters of terrorism:

    1. President Bush signed Executive Order 13224 giving the United 
States greater power to freeze terrorist-related assets;
    2. The United States won the adoption of UN Security Council 
Resolutions 1373 and 1390, which require member nations to join in the 
effort to disrupt terrorist financing;
    3. We are implementing the USA PATRIOT Act to broaden and deepen 
information sharing and the regulatory net for our financial system;
    4. We are engaging multilateral institutions such as the Financial 
Action Task Force and the international financial institutions (IFI's) 
to focus on terrorist financing;
    5. We established Operation Green Quest--an interagency task force 
which has augmented existing counter-terrorist efforts by bringing the 
full scope of the Government's financial expertise to bear against 
systems, individuals, and organizations that serve as sources of 
terrorist funding; and
    6. We are sharing information across the Federal Government, with 
the private sector, and among our allies to crack down on terrorist 
financiers.

    The President's Executive Order 13224 explicitly targets terrorist 
financing and casts a global net over the fundraisers, donors, transfer 
agents, and bankers of terror. It subjects managers and fiduciaries of 
nongovernmental organizations, foreign financial institutions and 
donors to economic sanctions if they support terrorism.
    The UN Security Council Resolutions amplify the effect of the 
President's Executive Order. The resolutions--1373 and 1390--direct 
member states to criminalize terrorist financing and to adopt 
regulatory regimes intended to detect, deter, and freeze terrorist 
funds. The UN actions have been critical to winning support for our 
campaign, and they have been essential tools for building the 
international coalition against terrorist financing.
    International alliances against terrorism are crucial, because the 
overwhelming bulk of terrorist assets, cashflows, and evidence lie 
outside our borders. We are working strategically with allies around 
the world to address regional threats: we have recently submitted names 
to the UN jointly with Italy, Saudi Arabia, China, and central Asian 
states. To augment our allies' good intentions and capabilities, we are 
providing technical assistance to many Persian Gulf, African, South 
American, and Southeast Asian countries. Our assistance allows them to 
accomplish their goals for neutralizing those who support terror.
    We are reaching out to other international organizations, such as 
the Financial Action Task Force (FATF), an international body created 
to fight money laundering, to impact terrorist financing. FATF adopted 
eight principles of conduct specifically directed at terrorist 
financing--Eight Special Recommendations that all member nations have 
endorsed and moved to implement. The U.S. Treasury Department has also 
prompted the G7, the G20, the IMF, and the World Bank to take actions, 
enlisting their member nations in the comprehensive program against 
terror.
    Domestically, the enactment of the USA PATRIOT Act has provided 
several tools for the financial front of the war. The USA PATRIOT Act 
imposes responsibilities for opening and monitoring bank accounts, 
permits information sharing within the Government and among financial 
institutions, bars transactions with shell banks, requires information 
from foreign financial institutions, protects sensitive evidence from 
disclosure, and expands the industry sectors subject to rigorous anti-
money laundering and terrorist financing compliance programs. The USA 
PATRIOT Act also encourages partnerships between the Government and the 
private sector. Treasury and the FBI have reached out to the financial 
services sector in order to develop effective screening mechanisms for 
suspect transactions.
    Over the past year, we have seen successes in the financial war on 
terrorism.
    For example, we exposed and dismantled the al Barakat financial 
network. Al Barakat's worldwide network and its owners were channeling 
several million dollars a year to and from al Qaeda. Last November, 
Treasury agents shut down eight al Barakat offices in the United 
States, and took possession of evidence that will be investigated for 
further leads in the terrorist money trail. Millions of dollars have 
moved through these U.S. offices of al Barakat. At its core, it was a 
conglomerate operating in 40 countries around the world with business 
ventures in telecommunications, construction, and currency exchange. 
They were a source of funding and money transfers for bin Laden. Our 
allies around the world are joining us in cutting al Barakat out of the 
world financial system. Dubai, UAE is the home base of al Barakat. The 
UAE blocked the accounts of al Barakat, paralyzing the nerve center of 
the operation.
    Another success is our action against the Holy Land Foundation for 
Relief and Development. Holy Land headquartered in Richardson, Texas, 
raises millions of dollars annually that is used by Hamas. In 2000, 
Holy Land raised over $13 million. Holy Land supports Hamas activities 
hrough direct fund transfers to its offices in the West Bank and Gaza. 
Holy Land funds are used by Hamas to support schools that serve Hamas 
ends by encouraging children to become suicide bombers and to recruit 
suicide bombers by offering support to their families. Our action 
blocked their current accounts and prohibits U.S. persons from doing 
business with Holy Land in the future, thereby stopping the flow of 
millions of dollars every year from the United States to Hamas.
    Our war on terror is working--both here in the United States and 
overseas. We are harvesting information, and we are putting it to good 
use. We are seeing progress. We have frozen dollars and the assets of 
organizations, stopping acts of terror before they can occur, and 
forcing terrorist backers to riskier, more vulnerable positions.
    Our efforts are having real-world effects. al Qaeda and other 
terrorist organizations are suffering financially as a result of our 
actions. Potential donors are being more cautious about giving money to 
organizations where they fear that the money might wind up in the hands 
of terrorists. In addition, greater regulatory scrutiny in financial 
systems around the world is further marginalizing those who would 
support terrorist groups and activities.
    The war on terrorism is only beginning, and it is certain to demand 
constant vigilance. In the year since that terrible day, we have hit 
them hard. Our goal is to bankrupt their institutions and beggar their 
bombers. This war--the financial war against terrorism--won't be easy 
and much more remains to be done. We are off to a good start but it is 
a long obstacle filled road ahead. We will not relent.
Executive Order 13224
    ``We will starve terrorists of funding, turn them against each 
other, rout them out of their safe hiding places, and bring them to 
justice.''

        President George W. Bush
        September 24, 2001

    On September 24, President Bush issued Executive Order 13224, 
authorizing the blocking of the assets of terrorists and those who 
assist them.
    The Order expands the Treasury Department's power to target the 
support structure of terrorist organizations, freeze the assets subject 
to U.S. jurisdiction and block the transactions of terrorists and those 
that support them, and deny them 
access to U.S. markets.
Disrupting the Financial Infrastructure of Terrorism
    The Executive Order--

 Targets all individuals and institutions linked to global 
    terrorism.
 Allows the United States to freeze assets subject to U.S. 
    jurisdiction and prohibit transactions by U.S. persons with any 
    person or institution designated pursuant to the Executive Order 
    based on their association with terrorists or terrorist 
    organizations.
 Names specific individuals and organizations whose assets and 
    transactions are to be blocked.
 Punishes financial institutions at home and abroad that 
    continue to provide resources and/or services to terrorist 
    organizations.
Authorities Broadened
    New Executive Order actions and authorities:

    The Executive Order blocks the U.S. assets and transactions of 
specified terrorists, terrorist organizations, and terrorist supporters 
and authorizes the imposition of blocking orders on additional domestic 
or foreign institutions that support terrorism. It also directs Federal 
agencies to work with other nations to cut off funding and shut down 
the institutions that support or facilitate terrorism.
    The new Executive Order broadens existing authority in three 
principal ways:

 It expands the coverage of existing Executive Orders from 
    terrorism in the Middle East to global terrorism.
 The Order expands the class of targeted groups to include all 
    those who provide financial or material support to, or who are 
    ``associated with,'' designated terrorist groups.
 Establishes our ability to block the U.S. assets of, and deny 
    access to U.S. markets to, those foreign banks that refuse to 
    freeze terrorist assets.
Blocking Terrorist Assets
 The Order prohibits U.S. transactions with designated 
    terrorist organizations, leaders, support networks, donors, and 
    corporate and charitable fronts.
 Terrorist groups from around the world are designated under 
    the Order, including organizations that are related to the al Qaeda 
    network.
 Terrorist leaders and operatives are listed; including Osama 
    bin Laden and his chief lieutenants along with many of the entities 
    that act as a support network for al Qaeda, including charities and 
    front organizations.
 The Order authorizes the Secretary of State and the Secretary 
    of the Treasury to make additional terrorist designations.

  --The Treasury's Office of Foreign Assets Control (OFAC) plays a key 
        role in implementing and administering the Order, including by 
        working with financial institutions to ensure that they 
        implement blocking orders and maintaining a current list of 
        designated entities on its website: http://www.ustreas.gov/
        offices/enforcement/ofac
Results
    Two hundred thirty-six individuals, entities, and organizations are 
currently designated under the Executive Order as supporters of 
terrorism. This includes 112 individuals ranging from organizational 
leaders such as Osama bin Laden and his key lieutenants to terrorist 
operatives, financiers, and intermediaries around the globe. All 34 
U.S.-designated Foreign Terrorist Organizations are listed under the 
order as are 15 other terrorist organizations such as the Continuity 
IRA and the East Turkistan Islamic Movement. Seventy-four other 
companies, charitable organizations, or entities who support and/or 
finance terrorism are also listed under the Order. Working bilaterally 
and through the United Nations and other multilateral institutions, we 
have spread the effort to freeze terrorist assets across the globe. 
Over 165 countries and jurisdictions have issued blocking orders 
against the assets of terrorists. Since September 11, 2001, $112 
million in terrorist assets have been frozen worldwide in over 500 
accounts. Thirty-four million dollars of those assets are frozen in the 
United States, $78 million overseas.
    While the money frozen in bank accounts is one measure of the 
impact of the blocking orders, it is not the most important one. Each 
of the accounts frozen has the potential to be a pipeline for far more 
money than what was in the account on the day it was frozen. In 
addition to closing off these identified pipelines, blocking actions 
have a deterrent effect leading those who would assist the financing of 
terrorism to avoid use of the traditional financial system. Finally, 
following the money assists worldwide law enforcement, intelligence, 
and military communities to identify, capture, arrest, and neutralize 
terrorists.
    The Executive Order applies to all global terrorists. The list of 
designees includes 74 terrorists or supporters of terrorism not part of 
the al Qaeda network such as Shining Path, the REAL IRA, the Tamil 
Tigers, Hamas, ETA, and Hezbollah, among others.
    Just as the United States needed new Government powers to enable 
the financial war on terrorism to begin, other nations around the globe 
examined their laws and sought new legislation to enable them to engage 
in the financial front of the war on terrorism. Since September 11, 
over 180 countries and jurisdictions have implemented, passed, or 
drafted legislation strengthening their abilities to combat the 
financing of terrorism.
USA PATRIOT Act
    On October 26, 2001, the President signed into law the Uniting and 
Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001. Contained 
within this comprehensive package is a wide array of provisions 
designed to enhance our ability to combat terrorism, the financing of 
terrorism, and money laundering.
I. Provisions Bolstering our Anti-Money Laundering/Anti-Terrorist
  Financing Regulatory Regime
 The USA PATRIOT Act contains sweeping revisions to our anti-
    money laundering and antiterrorist financing regime that 
    dramatically enhanced Treasury's ability to combat the financing of 
    terrorism and money laundering. These provisions reflect the 
    important principles of: (1) enhancing transparency in financial 
    transactions; (2) protecting the international gateways to the U.S. 
    financial system; and (3) increasing the vigilance of all our 
    financial institutions that are themselves the gatekeepers of the 
    financial system.
 Over the past year we have:

  --Issued a series of proposed and interim regulations targeting money 
        laundering and terrorist financing risks associated with 
        correspondent accounts maintained by foreign financial 
        institutions.
  --Issued jointly with the Federal financial regulators proposed rules 
        requiring banks, securities brokers, futures commission 
        merchants, and mutual funds to establish basic customer 
        identification and verification procedures.
  --Issued regulations requiring key financial sector industries to 
        implement anti-money laundering programs designed to prevent 
        the services they offer from being used to facilitate money 
        laundering or the financing of terrorism.
II. Provisions Enhancing the Ability to Share Critical Information
 The USA PATRIOT Act permits and facilitates greater 
    information sharing among law enforcement and the intelligence 
    community.
 Treasury has issued regulations implementing another provision 
    of the Act designed to improve two other key channels of 
    communication regarding terrorism and money laundering between the 
    Government and financial institutions; and among the financial 
    institutions themselves.
 Treasury's FinCEN has developed a new, highly secure website 
    through which financial institutions will be able to file Bank 
    Secrecy Act information electronically. The same system will also 
    permit FinCEN, as well as financial regulators and law enforcement, 
    to send alerts or other communications directly to financial 
    institutions in a secure environment. The USA PATRIOT Act 
    Communication System (PACS) has the capability of providing an 
    instantaneous communication link between FinCEN and all financial 
    institutions and will better enable us to fight terrorism and 
    financial crime.
III. Provisions Providing the Additional Tools Necessary to Block
   and Freeze Terrorist Assets
 The USA PATRIOT Act also makes several amendments to 
    International Emergency Economic Powers Act (IEEPA), which enhances 
    our ability to freeze terrorist assets. In the financial war on 
    terrorism, this blocking and freezing power has been an essential 
    weapon in our arsenal. Among others things, the amendments clarify 
    the authority (1) to freeze assets during an investigation, and (2) 
    to use classified information to support a blocking order without 
    having to reveal that information to anyone other than a reviewing 
    court.
Results
    The USA PATRIOT Act was enacted with the assistance of the Federal 
banking regulators, the Securities and Exchange Commission, the 
Commodity Futures Trading Commission, and the Department of Justice. 
Since the USA PATRIOT Act was enacted, the Treasury Department has 
worked with these agencies to issue over dozen regulations covering a 
wide array of financial institutions and transactions.
Charities
    Unfortunately, some charities have been abused by those who finance 
terror, through schemes to siphon money away from humanitarian purposes 
and to funnel it to terrorism. Charities across the world do important 
work, making a difference in the lives of millions of people, and the 
sanctity of charitable giving is a critical component of many cultures. 
In 2000, for example, Americans donated $133 billion dollars to charity 
with humanitarian intent. Donors around the world deserve to know that 
protections are in place to assure that their contributions are being 
channeled to the good purposes intended.
The President's Executive Order
    Under the authority of E.O. 13224, the United States has designated 
10 foreign charitable organizations as having ties to al Qaeda or other 
terrorist groups and has shut down two prominent U.S.-based charities 
with alleged ties to Osama bin Laden and the Taliban. In addition, the 
U.S. Government has frozen the assets of the largest U.S.-based Islamic 
charity which acted as a funding vehicle for HAMAS. Six million three 
hundred thousand dollars in U.S. charitable funds have been frozen to 
date and an additional $5.2 million have been frozen or seized in other 
countries.
Outreach to Safeguard Charitable Organizations from Abuse by Terrorists
    U.S. Treasury officials have met with charitable sector watchdog 
and accreditation organizations to raise their awareness of the threat 
posed by terrorist financing including the Better Business Bureau Wise 
Giving Alliance and the International Committee on Fundraising 
Organizations.
    Our goal is to guard charities against abuse without chilling 
legitimate charitable works. Our strategic approach, as set forth in 
the recently published 2002 National Money Laundering Strategy, 
involves domestic and international efforts to ensure that there is 
proper oversight of charitable activities as well as transparency in 
the administration and functioning of the charities. It also involves 
greater coordination with the private sector to develop partnerships 
that include mechanisms for self-policing by the charitable and 
nongovernmental organization sectors.
International Coalition-building
    We are seeking to increase the transparency and oversight of 
charities through multilateral efforts. The Financial Action Task Force 
(FATF) adopted a recommend-
ation committing all member nations to ensure that nonprofit 
organizations cannot be misused by financiers of terrorism. The United 
States submitted a paper to the FATF in June 2002 discussing our 
approach to combating such abuse. Going forward, we will work with FATF 
to promote international best practices on how to protect charities 
from abuse or infiltration by terrorists and their supporters.
    We are working bilaterally and regionally with countries in the 
Persian Gulf to develop best practices for ensuring the accountability 
of charitable organizations, and we have urged international watchdog 
groups to expand their work to ensure transparency in charitable 
operations. The vast majority of donors give to charity for 
humanitarian, altruistic reasons. It is an egregious abuse of their 
altruism to allow any of these funds to be diverted to terrorism.
Results
    The United States has secured commitments from international 
financial groups--such as FATF--to develop best practices to increase 
oversight of charities.
    The United States has designated 10 foreign charitable 
organizations as having ties to al Qaeda and other terrorist groups and 
has shut down two prominent U.S.-based charities with alleged ties to 
Osama bin Laden and the Taliban. In addition, the U.S. Government has 
frozen the assets of the largest U.S.-based Islamic charity which acted 
as a funding vehicle for Hamas. Six million three hundred thousand 
dollars in U.S. charitable funds have been frozen to date and an 
additional $5.2 million have been frozen or seized in other countries.
Charities Abused by Terrorist Groups Shut Down by the United States
    On January 9, 2002, the United States designated the Afghan Support 
Committee (ASC), a purported charity, as an al Qaeda supporting entity. 
The ASC operated by soliciting donations from local charities in Arab 
countries, in addition to fundraising efforts conducted at its 
headquarters in Jalalabad, Afghanistan, and subsequently in Pakistan. 
The ASC falsely asserted that the funds collected were destined for 
widows and orphans. In fact, the financial chief of the ASC served as a 
key leader of organized fundraising for Osama bin Laden. Rather than 
providing support for widows and orphans, funds collected by the ASC 
were turned over to al Qaeda operatives. With our blocking action on 
January 9, 2002, we publicly identified the scheme being used by ASC 
and disrupted this flow of funds to al Qaeda.
    Also on January 9, 2002, we designated the Pakistani and Afghan 
offices of the Revival of Islamic Heritage Society (RIHS). The RIHS is 
an example of an entity whose charitable intentions were subverted by 
terrorist financiers. The RIHS was a Kuwaiti-based charity with offices 
in Pakistan and Afghanistan. The Peshawar, Pakistan, office director 
for RIHS also served as the ASC manager in Peshawar. The RIHS Peshawar 
office defrauded donors to fund terrorism. In order to obtain 
additional funds from the Kuwait RIHS headquarters, the RIHS Peshawar 
office padded the number of orphans it claimed to care for by providing 
names of orphans that did not exist or who had died. Funds sent for the 
purpose of caring for the nonexistent or dead orphans were instead 
diverted to al Qaeda terrorists. In this instance, we have no evidence 
that this financing was done with the knowledge of RIHS headquarters in 
Kuwait.
    On March 11, 2002, the United States and Saudi Arabia jointly 
designated the Somali and Bosnian offices of the Saudi-based al 
Haramain organization. Al Haramain is a Saudi Arabian-based charity 
with offices in many countries. Prior to designation, we compiled 
evidence showing clear links demonstrating that the Somali and Bosnian 
branch offices were supporting al Qaeda. For example, we uncovered a 
history of ties between al Haramain Somalia and al Qaeda, the 
designated organization al Itihaad al Islamiya (AIAI), and other 
associated entities and individuals. Over the past few years, al 
Haramain Somalia has provided a means of funneling money to AIAI by 
disguising funds allegedly intended to be used for orphanage projects 
or the construction of Islamic schools and mosques. The organization 
has also employed AIAI members. Al Haramain Somalia has continued to 
provide financial support to AIAI even after AIAI was designated as a 
terrorist organization by the United States and the United Nations. In 
late-December 2001, al Haramain Somalia was facilitating the travel of 
AIAI members in Somalia to Saudi Arabia. The joint action by the United 
States and Saudi Arabia exposed these operations.
    On December 4, 2001, we blocked the assets of the Holy Land 
Foundation for 
Relief and Development, which describes itself as the largest Islamic 
charity in the United States. It operates as a U.S. fundraising arm of 
the Palestinian terrorist organization Hamas. The Holy Land Foundation 
for Relief and Development, head-
quartered in Richardson, Texas, raises millions of dollars annually 
that is used by Hamas. In 2000, Holy Land raised over $13 million. Holy 
Land supports Hamas activities through direct fund transfers to its 
offices in the West Bank and Gaza. Holy Land Foundation funds are used 
by Hamas to support schools that serve Hamas ends by encouraging 
children to become suicide bombers and to recruit suicide bombers by 
offering support to their families.
    On December 14, 2001, OFAC utilized this authority to block suspect 
assets and records during the pendency of an investigation in the case 
of Global Relief Foundation and Benevolence International Foundation, 
two charities with locations in the United States.
    We have also designated as terrorist supporters the al Rashid Trust 
and the Wafa Humanitarian Organization both Pakistan based al Qaeda 
financier organizations. Wafa was a militant supporter of the Taliban. 
Documents found in Wafa's offices in Afghanistan revealed that the 
charity was intimately involved in assassination plots against U.S. 
citizens, as well as the distribution of ``how to'' manuals on chemical 
and biological warfare.
Hawalas
    The word ``hawala,'' meaning ``trust'' refers to a fast and cost-
effective method for worldwide remittance of money or value, 
particularly for persons who may be outside the reach of the 
traditional financial sector. In some nations hawala is illegal; in 
others the activity is considered a part of the ``gray'' economy. It is 
therefore difficult to measure accurately the total volume of financial 
activity associated with the system; however, it is estimated that the 
figures are in the tens of billions of dollars, at a minimum. Officials 
in Pakistan, for example, estimate that more than $7 billion flow into 
the nation through hawala channels each year.
    The very features which make hawala attractive to legitimate 
customers--efficiency, anonymity, and lack of a paper trail--also make 
the system attractive for the transfer of illicit funds. As noted in a 
recent report of the Asia Pacific Group (APG) on Money Laundering, the 
terrorist events of September 2001 have brought into focus the ease 
with which alternative remittance and underground banking systems may 
be utilized to conceal and transfer illicit funds. Not surprisingly, 
concerns in this area have led many nations to reexamine their 
regulatory policies and practices in regard to hawala and other 
alternative remittance systems.
Actions
    The USA PATRIOT Act requires hawalas to register as ``money 
services business'' or ``MSB's'' which subjects them to money 
laundering regulations including the requirement that they file 
Suspicious Activity Reports (SAR's).
    The USA PATRIOT Act makes it a crime for the money transfer 
business owner to move funds he knows are the proceeds of a crime or 
are intended to be used in unlawful activity.
    The new U.S. regulatory requirements are echoed in the principals 
set forth in the Special Recommendations on Terrorist Financing, issued 
in October 2001, by the Financial Action Task Force (FATF) on Money 
Laundering. The FATF has called upon all countries to:

          ``take measures to ensure that persons or legal entities, 
        including agents, that provide a service for the transmission 
        of money or value, including transmission through an informal 
        money or value transfer system or network, should be licensed 
        or registered and subject to all the FATF Recommendations that 
        apply to banks and nonbank financial institutions. Each country 
        should ensure that persons or legal entities that carry out 
        this service illegally are subject to administrative, civil or 
        criminal sanctions.''
Results
    The operations of several hawalas implicated in terrorist financing 
have been disrupted. U.S. experts have worked with officials in other 
nations on proposed licensing and/or registration regimes for 
hawaladars, to ensure greater transparency and recordkeeping in their 
transactions.
    Using criminal authorities stemming in part from the USA PATRIOT 
Act, U.S. law enforcement has charged individuals who are illegally 
operating money remitting businesses.
    Under the provisions of the USA PATRIOT Act, well over 10,000 money 
service businesses have registered with the Federal Government and are 
now required to report suspicious activities. This provides law 
enforcement with an additional window into financial transactions 
previously unregulated by the Federal Government.
    FATF adopted eight special recommendations to impose anti-money 
laundering rules on all alternative systems used for transferring 
value, including hawala. Members, as well as many nonmember nations are 
currently working to implement new legal and regulatory measures in 
accordance with the FATF recommendation.
    At a conference on hawala in the UAE in May 2002, a number of 
governments agreed to adopt the FATF recommendation and shortly 
thereafter the UAE government announced it would soon impose a 
licensing requirement on hawalas. Participants at the UAE meeting 
drafted and agreed upon the Abu Dhabi Declaration on Hawala which set 
forth the following principles:

 Countries should adopt the 40 Recommendations of the Financial 
    Action Task Force (FATF) on Money Laundering and the 8 Special 
    Recommendations on Terrorist Financing in relation to remitters, 
    including Hawalas and other alternative remittance providers.
 Countries should designate competent supervisory authorities 
    to monitor and enforce the application of these recommendations to 
    Hawalas and other alternative remittance providers.
 Regulations should be effective but not overly restrictive.
 The continued success in strengthening the international 
    financial system and combating money laundering and terrorist 
    financing requires the close support and unwavering commitment of 
    the international community.
 The international community should work individually and 
    collectively to regulate the Hawala System for legitimate commerce 
    and to prevent its exploitation or misuse by criminals and others.
International Efforts
UN
    On September 28, 2001, the UN adopted UNSCR 1373, requiring all 
member states to prevent and suppress the financing of terrorist acts.

 The UN also required all member states to submit reports on 
    the steps they have taken to implement this resolution. As of June 
    27, 2002, 164 states had completed their reports. The UN is now 
    reviewing those reports with the intent of identifying gaps that 
    member nations need to fill in order to comply with UNSCR 1373.

    The UN adopted UNSCR 1390 on January 16, 2002, which modifies and 
continues the international sanctions against the Taliban, Osama bin 
Laden, and al Qaeda as set forth by UNSCR 1267 (1999) and 1333 (2000). 
Together these resolutions obligate all UN member states to ``Freeze 
without delay the funds and other financial assets or economic 
resources'' of those entities and individuals designated by the UN. 
Currently, 288 individuals and entities are on this list (135 al Qaeda 
linked and 153 Taliban linked).
G7
    The G7 Finance Ministers and Central Bank Governors issued an 
Action Plan to Combat the Financing of Terrorism on October 6, 2001. 
Under the plan, the G7 countries:

 Committed to ratifying the UN convention on the Suppression of 
    Terrorism.
 Called on the Financial Action Task Force (FATF) to hold an 
    extraordinary session and play a vital role in fighting the 
    financing of terrorism.
 Encouraged all countries to develop financial intelligence 
    units (FIU's) and share information more extensively.
Financial Action Task Force (FATF)
    On October 31, 2001, at the United States' initiative, the 31-
member FATF issued Eight Special Recommendations on Terrorist 
Financing, to be adopted by all member nations:

 Ratify the UN International Convention for the Suppression of 
    the Financing of Terrorism and implement relevant UN Resolutions 
    against terrorist financing.
 Require financial institutions to report suspicious 
    transactions linked to terrorism.
 Criminalize the financing of terrorism, terrorist acts, and 
    terrorist organizations.
 Freeze and confiscate terrorist assets.
 Provide the widest possible assistance to other countries' 
    laws enforcement and regulatory authorities for terrorist financing 
    investigations.
 Impose anti-money laundering requirements on alternative 
    remittance systems.
 Require financial institutions to include accurate and 
    meaningful originator information in money transfers.
 Ensure that nonprofit organizations cannot be misused to 
    finance terrorism.

    Many non-FATF members have committed to complying with the 8 
Recommendations and over 80 non-FATF members have already submitted 
reports to FATF assessing their compliance with these recommendations.
    FATF will build on its successful record in persuading 
jurisdictions to adopt anti-money laundering rules to strengthen global 
protection against terrorist finance. As part of this effort, FATF has 
established a terrorist financing working group devoted specifically to 
developing and strengthening FATF's efforts in this field. Among other 
things, it has begun a process to identify nations that will need 
assistance to come into compliance with the 8 Recommendations.
G20
    The G20 Finance Ministers and Central Bank Governors issued an 
Action Plan on Terrorist Financing on November 17, 2001. Under the 
plan, G20 countries agreed to:

 Implement UN measures to combat terrorist financing, including 
    blocking terrorist access to the financial system.
 Establish FIU's and enhance information sharing.

    Provide technical assistance to countries that need help in 
combating terrorist financing and called on the International Financial 
Institutions to provide technical assistance in this area.
International Financial Institutions
    In response to calls by the International Monetary and Financial 
Committee and the Development Committee, the IMF and World Bank each 
developed and are implementing action plans which call for intensified 
work on anti-money laundering and the combat against the financing of 
terrorism (AML /CTF). The action plans call for joint Fund and Bank 
action:

 Expand Fund/Bank involvement in anti-money laundering work to 
    include efforts aimed at countering terrorism financing.
 Expands Fund/Bank anti-money laundering work to cover legal 
    and institutional framework issues in addition to financial 
    supervisory issues.
 Agreeing with the Financial Action Task Force on a converged 
    global standard on AML /CTF.
 Increases technical assistance to enable members to strengthen 
    their AML /CTF regimes in accord with agreed international 
    standards.
 Conducting a joint Fund/Bank study of informal funds transfer 
    systems.

    Under its Action Plan, the World Bank is also integrating AML /CTF 
issues in the Bank's country assistance strategies.
    Under its Action Plan, the Fund is accelerating its Offshore 
Financial Center assessment program, and has circulated a voluntary 
questionnaire on AML /CFT in the context of the IMF's Article IV 
consultations with its members. As part of its Article IV consultation, 
the United States provided detailed responses to the AML /CFT 
questionnaire.
    In addition, the IMF early this year invited its member countries 
to submit reports on steps that they have taken to combat the financing 
of terrorism. As of the final week in August 2002, over 150 countries 
out of a total IMF membership of 184 had submitted reports.
Egmont Group
    The Egmont Group is an international organization of 69 financial 
intelligence units (FIU's) from various countries around the world. 
Each serves as an international financial network, fostering improved 
communication among FIU's in sharing information and training.
    The FIU's in each nation received financial information from 
financial institutions pursuant to each government's particular anti-
money laundering laws, analyzes and processes these disclosures, and 
disseminates the information domestically to appropriate government 
authorities and internationally to other FIU's in support of national 
and international law enforcement operations.
    Since September 11, the Egmont Group has taken steps to use its 
unique intelligence gathering and sharing capabilities to support the 
United States in its global war on terrorism. On October 31, 2001, 
FinCEN (the U.S. FIU) hosted a special Egmont Group meeting that 
focused on the FIUs' role in the fight against terrorism. The FIU's 
agreed to:

 Work to eliminate impediments to information exchange.
 Make terrorist financing a form of suspicious activity to be 
    reported by all financial sectors to their respective FIU's.
 Undertake joint studies of particular money laundering 
    vulnerabilities, especially when they may have some bearing on 
    counterterrorism, such as hawala.
 Create sanitized cases for training purposes.

    After September 11, the Egmont Group reached out to nations across 
the globe to increase the information sharing that is vital to pursuing 
a global war on terrorism. In June 2002, 11 new FIU's were admitted to 
the Egmont Group, increasing its size to 69 members.
    Approximately 10 additional FIU's are being considered for 
admission to the Egmont Group. Egmont is planning several training 
sessions to continuously improve the analytical capabilities of FIU 
staff around the world.
Technical Assistance and Diplomatic Outreach
    Nations wanting to safeguard their financial systems from abuse by 
terrorists have sought the expertise of the U.S. Government. We have 
met with officials from over 111 nations, reviewing systems and 
providing input to increase transparency of financial transactions and 
better enable financial institutions and regulators to identify 
suspicious activities. We have in cooperation with other Federal 
agencies presented training programs to countries that are crucial to 
the war on terrorism that focus on the creation of an effective 
legislative framework to combat terrorism. These programs are ongoing. 
We have also conducted, in cooperation with other Federal agencies, 
reviews of priority countries' laws and enforcement mechanisms against 
terrorism and made recommendations for changes and reform and proposed 
follow up technical assistance to facilitate recommended changes and 
reforms. These reviews are also ongoing.
    After September 11, Treasury created the Office of International 
Enforcement Affairs (OIEA) to coordinate and focus Treasury law 
enforcement bureau's international training and technical assistance 
work to complement and support U.S. Government priorities in 
international law enforcement and antiterrorist fundraising efforts. As 
part of this effort, Treasury is using the International Law 
Enforcement Academies around the world, including in the newly 
constituted Costa Rica facility, to better train law enforcement in the 
field of terrorist financing.
    Since September 11, 2001, Treasury's Office of Technical Assistance 
has deployed dozens of technical assistance missions around the world 
to combat financial crimes and terrorist financing. In several 
instances, in addition to offering TA, these teams have received vital 
tactical information on terrorist activities and terrorist finance and 
have ensured that this information was placed in the hands of the 
appropriate authorities. In addition, the Office of Foreign Assets 
Control, the Office of Comptroller of Currency, and FinCEN have 
traveled abroad to provide needed training and assistance to members of 
the regulatory community in other countries to strengthen their 
capacity to detect, monitor, and uncover terrorist financing.
Results
    To date, $112 million in the assets of terrorists and their 
supporters has been 
frozen worldwide and the international pipeline of terrorists funds has 
been constricted. Over 165 countries have issued blocking orders 
against the assets of terrorists and over 80 countries have implemented 
or are in the process of drafting new laws to combat terrorist 
financing.
    G7 Finance Ministers and Central Bank Governors announced the first 
joint G7 designation and blocking action on April 20, 2002.
    G7 Finance Ministers and Central Bank Governors on June 15, 2002, 
urged the IMF and the World Bank to begin conducting integrated and 
comprehensive assessments of standards to combat money laundering and 
financing of terrorism.

 IMF and World Bank Executive Boards on July 26 and August 6, 
    respectively, endorsed proposals to begin 12-month pilot programs 
    to comprehensively assess their members anti-money laundering and 
    terrorist financing regimes and performance. Such assessments are 
    expected to commence shortly.
 An August 8, 2002, IMF document titled, ``IMF Advances Efforts 
    to Combat Money Laundering and Terrorist Finance'' (available on 
    the IMF website: www.imf.org) provides details on the program 
    endorsed by the Executive Board.

    Since September 11, the international financial institutions have 
increased focus on terrorist financing and anti-money laundering in 
their work. The IMF in its assessment of offshore financial centers 
evaluates financial supervision and regulation, and helps members 
identify gaps. In 2002, 8 such assessments are already completed and 
another 15 or so are scheduled or underway.
    IMF and World Bank reviews and assessments of their members' 
performance and strategy now generally incorporate focus on issues 
relating to terrorism financing and anti-money laundering. IMF Article 
IV consultations with members now encompass such reviews. In line with 
its action plan, the World Bank's country assistance strategies 
increase focus on the member's framework and regime to combat money 
laundering and the financing of terrorism.
    As of December 1999, the UN has called on all member states to sign 
its Convention for the Suppression of the Financing of Terrorism. Since 
September 11, 71 
nations, including the United States, have done so, bringing the total 
number of signatories to 131. By so doing, the countries pledge to make 
the financing of terrorism a criminal act in their jurisdictions and to 
cooperate with other signatories in combating it.
    In addition to the important UN action, joint designations are 
becoming more 
frequent:

 On March 11, 2002, the United States and Saudi Arabia jointly 
    designated two branches of a charity.
 On April 19, 2002, the G7 jointly designated nine individuals 
    and one entity.
 The European Union has issued three lists of designated 
    terrorists and terrorist groups for blocking.
 On August 29, 2002, the United States and Italy blocked the 
    assets of twenty-five individuals and entities because of their 
    support for and connections to terrorism.
 On September 6, the United States and Saudi Arabia jointly 
    designated Wa'el Hamza Julaidan, an associate of Osama bin Laden 
    and a supporter of al Qaeda terror.
 On September 9, the United Nations added to its list of 
    terrorists and terrorist supporters associated with Osama bin Laden 
    and his al Qaeda network the Eastern Turkistan Islamic Movement 
    (ETIM).
International Law Enforcement Cooperation
    One of the chief benefits of the financial war on terrorism and 
following the money is to identify and locate terrorists. There has 
been unprecedented law enforcement cooperation around the world as 
countries ferret out terrorist operatives and support networks. As 
information sharing and cooperation continue to improve, law 
enforcement will continue to encircle and unveil terrorist cells.
Results
 International law enforcement cooperation has resulted in over 
    2,400 arrests in 95 countries.
 Arrests have led to the prevention of terrorist attacks in 
    places like Singapore, Morocco, and Germany and have uncovered al 
    Qaeda cells and support networks in countries such as Italy, 
    Germany, and Spain.
 A working arrangement between the United States and 
    Switzerland signed on September 4, 2002, will result in the 
    assignment of Swiss and United States Federal agents to respective 
    terrorism and terrorist financing task forces to accelerate and 
    amplify work together on cases of common concern.
 Soon after September 11, the Bahamas provided critical 
    financial information through its FIU to FinCEN that allowed the 
    revelation of a financing network that supported terrorist groups 
    and stretched around the world.
 Interpol's website serves as a clearinghouse for foreign law 
    enforcement for the lists of those subject to freezing actions.
Domestic Law Enforcement Efforts
Green Quest
    Treasury's Operation Green Quest augments existing counter-
terrorist efforts by bringing the full scope of the Government's 
financial expertise to bear against systems, individuals, and 
organizations that serve as sources of terrorist funding. The 
initiative is targeting current terrorist funding sources and 
identifying possible future funding sources. Underground financial 
systems, illicit charities, and corrupt financial institutions are 
among the entities scrutinized as possible facilitators of terrorist 
funds.
    The initiative also targets cash smuggling, trademark violations, 
trade fraud, credit card fraud, drug trafficking, cigarette smuggling, 
and other activities that may fund terrorists. Operation Green Quest 
uses the full array of law enforcement techniques to pursue its 
objectives, including undercover operations, electronic surveillance, 
outbound currency operations, and the exploitation of intelligence, 
financial data, trade data, and confidential source data. Green Quest 
draws on the resources and expertise of the Treasury and Justice 
Departments and many other Federal agencies.
    The investigators with the Customs Service, the IRS, the FBI, and 
the Secret Service are globally recognized as among the best and 
brightest financial investigators in the world. They are second to 
none. The same talent pool and expertise that brought down Al Capone is 
now being dedicated to investigating Osama bin Ladin and his terrorist 
network.
    Operation Green Quest (OGQ) was established on October 25, 2001.
Customs
    After September 11, the U.S. Customs Service undertook an enhanced 
inbound/outbound bulk currency initiative directed at countries with 
known terrorist financing links. Customs inspectors at the Nation's 301 
ports of entry have made 369 seizures of smuggled currency and monetary 
instruments.
    The cash smuggling provisions of the USA PATRIOT Act increased 
penalties against those who bring in more than $10,000 in cash or 
monetary instruments with the intent of avoiding a reporting 
requirement.
    Cadres of Customs dogs are specifically trained to alert to the 
scent of dyes and inks in currency.
Results
    OGQ's investigations have resulted in over 40 arrests, 27 
indictments, and the seizure of over $16 million in bulk cash, (over $9 
million with Middle East connection) and are pursuing several hundred 
leads into potential terrorist financing networks. (For the year ending 
September 11, 2001, Operation Oasis seizures outbound to Middle and Far 
East countries totaled $5.216 million. Post-September 11 seizures 
outbound to the same countries total $16.1 million. Thus, there has 
been a threefold increase.)
    The increased scrutiny on terrorist financing has proved fruitful 
to law enforcement. We are seeing an increase in seizures made by the 
U.S. Customs Service. The following are a few of the seizures made to 
date:\2\
---------------------------------------------------------------------------
    \2\ The Treasury Department has not determined that these seizures 
are related to terrorism.

 Customs inspectors seized $624,691 in smuggled cash hidden in 
    plastic bags that were professionally sewn into the lining of a 
    comforter. The money-laced comforter was in a suitcase bound for 
    the Middle East aboard a commercial flight.
 Customs inspectors seized smuggled negotiable checks totaling 
    $1.06 million that was hidden in a parcel bound for the Middle 
    East.
 Customs inspectors seized a smuggled certificate of deposit 
    worth $297,000 that was concealed in a parcel bound for Central 
    America and which had originated in Asia.
 Recently Customs, U.S. Secret Service, and FBI agents 
    apprehended and the Justice Department subsequently indicted--
    Jordanian-born Omar Shishani in Detroit for smuggling $12 million 
    in forged cashier's checks into the United States. The Justice 
    Department's detention and arrest of Shishani resulted directly 
    from the Customs Service's cross-indexing of various databases, 
    including information obtained by the U.S. military in Afghanistan. 
    That information was entered into Custom's ``watch list,'' which, 
    when cross-checked against inbound flight manifests, identified 
    Shishani.

    In addition to preventing the cash from reaching its desired 
destination, these seizures have provided leads for new investigations 
into money laundering, terrorist finance and other criminal activity. 
The currency initiative has also resulted in the arrests of several 
individuals, including the first to be successfully prosecuted under 
the new bulk cash smuggling provisions of the USA PATRIOT Act.
                PREPARED STATEMENT OF LARRY D. THOMPSON
          Deputy Attorney General, U.S. Department of Justice
                            October 3, 2002

    Chairman Sarbanes, Ranking Minority Senator Gramm, Members of the 
Committee, I am pleased to appear before the Committee on Banking, 
Housing, and Urban Affairs to discuss issues related to money 
laundering, including the 2002 National Money Laundering Strategy and 
our progress on the financial front of the ongoing war on terrorism. I 
appreciate your attention to this important issue and your interest in 
the Administration's ongoing efforts to refine our battle plan against 
domestic and international money laundering.

    Initially, I would like to thank the Members of this Committee, as 
well as all of the Members of Congress, for your efforts in developing 
and passing two landmark pieces of legislation in prompt response to 
the threats that our Nation has encountered over the past year. The USA 
PATRIOT Act, passed in response to the reprehensible attacks of 
September 11, provided those of us whose mission it is to protect the 
people of the United States with a wide array of new measures that will 
serve to enhance our ability to carry out this work. The Sarbanes-Oxley 
Act of 2002, passed in response to the threat to our economic well-
being posed by corporate criminals, was a signal to those who seek to 
cheat hard-working Americans that these kinds of actions will not be 
tolerated. You should be proud of your accomplishments in passing these 
extraordinary bills, just as we at the Department of Justice are proud 
of our efforts to protect the physical and economic well-being of the 
people in this country.

    As the Members of this Committee are well aware, money laundering 
enforcement is a critical component in the fight against all kinds of 
criminal activity, whether it be international terrorism, drug 
trafficking, health care fraud, or white collar crime. It makes no 
difference whether money is the motive of the crime, as it is in the 
case of drug trafficking and fraud, or whether money is the fuel that 
powers the engine, as it is in the case of terrorism. Money is the key, 
and money laundering and other financial investigations allow us to 
unlock the doors to these criminal organizations and provide us a road 
map that ties together the links in the criminal organization. In cases 
where profit is the motive, following the money forward leads to those 
who seek to profit from their crimes. In terrorism cases, following the 
money backward leads to those who developed or planned the terrorist 
attacks. A graphic example of this principle was provided by our 
efforts following the attacks of September 11, where the financial 
trail provided the first links in our efforts to unravel the plot that 
led up to those attacks.

    Our country faces a multitude of threats during these challenging 
times, threats that law-abiding, hardworking Americans should not have 
to face, yet they do. International terrorists seek to undermine our 
security. Drug traffickers seek to 
poison the minds and the bodies of our children. Organized crime groups 
seek to corrupt our businesses and institutions. Corporate criminals 
seek to undermine our economic well-being. But we do not shrink from 
these challenges. In fact, they inspire us to work even harder, because 
the American people deserve to live their lives in a safe and secure 
world, and it is our duty to provide that safety and security for them. 
Those challenges inspire us to strive for new and better ways to 
utilize our resources, and to use our limited resources in the most 
effective manner that we can.

    The first step in marshaling our forces to confront a challenge is 
to develop a strategy. In the case of money laundering, the development 
of a strategy was mandated by Congress in 1998 with the passage of the 
Money Laundering and Financial Crimes Strategy Act of 1998. This Act 
(codified at Title 31, United States Code, Sec. 5340 et seq.) requires 
the President, acting through the Secretary of the Treasury and in 
consultation with the U.S. Attorney General, to develop a national 
strategy for combating money laundering and related financial crimes. 
The first National Strategy was issued in September 1999. The 2001 
Strategy was due to be presented to the Congress on September 12, 2001. 
The horrific events of September 11 and the legislative and law 
enforcement responses to it have obviously changed our approach to the 
Strategy. The 2002 Strategy reflects some of those changes. In addition 
to the five goals that comprised the 2001 Strategy, a sixth goal--
addressing terrorist financing--was added. The 2002 National Money 
Laundering Strategy was issued on July 25, 2002 and, as with all the 
previous Strategies, was signed by the Secretary of the Treasury and 
the U.S. Attorney General.

    The prevention, investigation, and prosecution of money laundering 
crimes pre-
sent unique challenges. Money itself is not contraband. The background 
circumstances surrounding the source, movement, and destination of the 
money must be ascertained to make such a determination and must be 
proven in court to convict someone of a money laundering offense. 
Furthermore, because money laundering encompasses all different kinds 
of criminal activity, the methods of money laundering will vary 
depending on the nature of the criminal activity that generated the 
illegal proceeds or that the money laundering is furthering.

    The 2002 National Money Laundering Strategy, building upon the 
previous Strategies, makes significant strides in advancing our battle 
plan against money laundering and, in fact, addresses some formidable 
issues head-on. In Goal One, the Strategy confronts the issue of 
defining the scope of the money laundering problem and the development 
of measures of effectiveness. Goal Two addresses the critical issue of 
terrorist financing. I will discuss the Department's progress on this 
front in more detail later in my testimony.

    Goal Three constitutes the core of the 2002 Strategy for purposes 
of law enforcement. This Goal sets forth what the Department believes 
are the major challenges in attacking money laundering. The first 
Objective of Goal Three is to enhance interagency coordination of money 
laundering investigations. Because money laundering encompasses all 
kinds of criminal activity, all of our major law enforcement agencies, 
as well as State and local law enforcement agencies, are involved in 
money laundering enforcement. The first priority in this regard is to 
establish an interagency targeting team to identify money laundering-
related targets for priority enforcement actions. This interagency 
targeting team has already been created and has met on several 
occasions. The purpose of this group is to identify those organizations 
or systems that constitute significant money laundering threats and to 
target them for coordinated enforcement action. This will ensure that 
all of our law enforcement agencies are focusing their resources on the 
most significant targets in a coordinated manner.

    The second priority in Goal Three is to create a uniform set of 
undercover guidelines for Federal money laundering enforcement 
operations. Our well-intended agents in the field are sometimes limited 
in conducting joint undercover operations because they must follow 
different agency guidelines. These guidelines are not arbitrary or 
archaic; they are carefully drafted guidelines to address policy 
concerns of the agencies, but sometimes they address these concerns in 
different ways. If we can find ways to overcome these differences or 
develop uniform guidelines that address the concerns and priorities of 
all of the agencies, our efforts in conducting these 
operations will be significantly enhanced.

    The third priority of Goal Three is to work with U.S. Attorneys' 
Offices to participate in Suspicious Activity Report (SAR) Review Teams 
where they do not currently exist but could add value. These SAR Review 
Teams are another vehicle for promoting interagency coordination. SAR's 
have been proven useful for identifying 
targets or trends in money laundering activity, and each law 
enforcement agency utilizes the SAR's. However, we have found that when 
an interagency task force is created to review the SAR's in a 
coordinated manner, the value of the SAR's is enhanced even further and 
investigative priorities can be identified and coordinated. DOJ and 
Treasury are both promoting the value of these SAR Review Teams to the 
investigators and prosecutors in the field. I am proud to say that, 
according to an Internal Revenue Service survey of its SAR Review 
Teams, U.S. Attorneys' Offices participate in 37 of the 41 Teams that 
have been established nationwide.

    Objective Two of Goal Three focuses on the High-Risk Money 
Laundering and 
Related Financial Crime Area (HIFCA) Task Forces. The first four 
HIFCA's were designated in the 2000 Strategy based on recommendations 
made by an inter-
agency working group. The first four HIFCA's were New York/New Jersey, 
San Juan, Puerto Rico, Los Angeles, and a ``systems'' HIFCA based in 
Texas and Arizona focusing on the issue of bulk movements of cash. In 
2001, Chicago and San Francisco were designated as HIFCA's. The HIFCA 
concept was another attempt to coordinate the resources of all of the 
law enforcement and regulatory agencies in a jurisdiction on the most 
significant money laundering targets or threats in the region. While a 
number of issues have hampered the HIFCA's from reaching their true 
potential, the 2002 Strategy will have DOJ and Treasury reviewing the 
HIFCA program and refining the mission, composition, and structure of 
the HIFCA Task Forces, so that they can fulfill the mission that was 
intended for them.

    With regard to Goal Two of the Strategy, we have no greater 
priority than the prevention of further terrorist acts against our 
citizens. We believe that the use of every tool in our arsenal is 
necessary to do that, and terrorist financing enforcement, one of the 
focuses of this Committee, is key. By ``terrorist financing 
enforcement,'' I mean the use of financial investigative tools to 
identify and prosecute persons involved in terrorist plots anywhere in 
the world. If we can identify would-be terrorists through financial 
techniques, or prosecute them for traditional financial crimes, or 
target their supporters and operatives with the crime of terrorist 
financing, we will be preventing violent attacks that may otherwise 
occur. We may never know exactly how many lives we saved, but we will 
certainly not be merely reacting to terrorism that we and the other 
parts of the Government failed to thwart.

    The Department of Justice's terrorist financing enforcement efforts 
are centered around two components the Attorney General established in 
the aftermath of September 11. Within the Criminal Division, we created 
the DOJ Terrorist Financing Task Force, a specialized unit consisting 
of experienced white-collar prosecutors drawn from several U.S. 
Attorneys' Offices, the Tax Division, and some litigating components of 
the Criminal Division, such as the Fraud Section, the Office of 
International Affairs and the Asset Forfeiture and Money Laundering 
Section. This Washington-based team of prosecutors works with their 
colleagues around the country, using financial investigative tools 
aggressively to disrupt groups and individuals who represent terrorist 
threats. These attorneys also work closely with the FBI's Financial 
Review Group, the Foreign Terrorist Tracking Task Force, and the 
Treasury Department's ``Operation Green Quest,'' which are developing 
preventive and predictive models and using advanced algorithms to mine 
data and identify terrorist suspects.

    In the field, the Attorney General created 93 Anti-terrorism Task 
Forces (ATTF's) to integrate and coordinate antiterrorism activities in 
each of the judicial districts. Each ATTF is headed by a veteran 
Assistant United States Attorney from each district, and includes 
Federal, State and local members of the district's Joint Terrorism Task 
Forces (JTTF's), the successful FBI program which serves as the ATTFs' 
operational arm. The ATTF program is managed by six National Regional 
Antiterrorism Coordinators from Main Justice, who work closely and 
share office space with the Terrorist Financing Task Force. How does 
this structure add to prevention? To appreciate this, one has to 
understand the terrorist financing laws, investigative tools, and 
information-sharing protocols, some of which were--thanks to Congress--
enhanced by the USA PATRIOT Act.

    First, the criminal laws relating to terrorist financing are a 
powerful tool in enhancing our ability to insert law enforcement into 
terrorist plots at the earliest possible stage of terrorist planning. 
For example, it is now a crime for anyone subject to U.S. jurisdiction 
to provide anything of value--including their own efforts or 
expertise--to organizations designated as ``foreign terrorist 
organization.'' It does not matter whether the persons providing such 
support intend their donations to be used for violent purposes, or 
whether actual terrorism results. If someone subject to U.S. 
jurisdiction provides, or even attempts to provide, any material 
support or resources to Hamas, Hezbollah, Al Qaeda, the Abu Sayyaf 
Group, or any of the other 34 designated groups, that person can be 
prosecuted in the U.S. courts. Our prosecutors need not prove that the 
support actually went to specific terrorist acts.

    This statute was used in the Charlotte, North Carolina Hezbollah 
case, the John Walker Lindh matter, the recent New York indictment of 
supporters of Sheik Rahman, and the actions we took over the last few 
months in Seattle, Detroit, and Buffalo. It is a powerful preventive 
tool. The Terrorist Financing Task Force is 
aggressively promoting this enforcement strategy, and it is available 
to help U.S. Attorneys' Offices and ATTF's where circumstances arise in 
the districts that may justify these charges.

    Second, the financial investigative tools at our disposal, which 
have been refined over the years for use in combating money laundering, 
can be employed in terrorist financing enforcement. Money laundering--
the process by which dirty money is transformed into seemingly 
legitimate proceeds--depends on financial transactions, which can now 
be identified through various Bank Secrecy Act reports that are 
required of the private financial community. The financing of 
terrorism, though it involves the opposite process--otherwise 
legitimate money being applied to dirty purposes--may be revealed by 
those same reports. To the extent we succeed in raising the global 
standards for money laundering prevention or enacting tools that help 
our own efforts in this area, we will be enhancing the world's and our 
own ability to stop terrorist financing. In this sense, terrorism 
prosecutors are money laundering prosecutors. They share the same 
expertise.

    Another criminal statute that was enhanced by the USA PATRIOT Act 
was Section 1960 of Title 18, prohibiting unlicenced or unregistered 
money remitters. This revised statute was used successfully in the 
District of Massachusetts. On November 14, 2001, a Federal grand jury 
in Boston returned an indictment charging Liban Hussein, the local 
President of an al Barakat money remitting house, and his brother, 
Mohamed Hussein, with a violation of Sec. 1960. This prosecution was 
part of a national, and indeed international, enforcement action 
against the al Barakat network. On April 20, 2002, Mohamed Hussein was 
convicted of this offense and he was recently sentenced to 18 months' 
incarceration for operating an unlicenced money remitting business.

    Finally, we are now enjoying an unprecedented level of cooperation 
and information sharing between and among U.S. Government agencies 
involved in counter-
terrorism, due in part to important changes made by the USA PATRIOT 
Act. As the Committee knows, prior to last October, there was no 
mechanism for sharing certain types of criminal investigative material 
with the intelligence community, and the intelligence community could 
not open their files to law enforcement. Such sharing was possible, but 
only in clearly-delineated situations and following very 
exacting procedures. For terrorist financing enforcement, the loosening 
of these rules--particularly when it involves information about 
terrorist financial supporters living in the United States--will be 
invaluable. Although this is only a small subset of information 
relevant to terrorist financing, it will assure that we are using the 
full spectrum of information from all sources to prevent future attacks 
before they occur, from open source to highly sensitive classified 
information.

    The structure we have in place both in Washington and the field to 
focus on terrorist financing enforcement will maximize the 
effectiveness of these tools. Where law enforcement and intelligence 
intersect, information-sharing with field office components necessarily 
involves their interaction with Washington. The Terrorist Financing 
Task Force can access and provide information to the ATTF's that they 
might not otherwise have, while providing a wider perspective on 
developing trends and joining disparate districts that may have pieces 
of the same puzzle without knowing it. This role is in addition to the 
legal expertise and litigation support we have gathered here at Main 
Justice for the specific purposes of ensuring that the terrorist 
financing enforcement option is a robust one that can be used by those 
senior government officials in charge of our war on terrorism.

    No discussion about money laundering would be complete without a 
discussion about drug money and our efforts to stop it. In the words of 
then-Associate Attorney General Stephen Trott in 1987, and who now sits 
on the U.S. Court of Appeals for the Ninth Circuit, ``[i]t is not 
enough to follow drug trails; it is also necessary to follow the money 
in order to reach high levels in drug organizations.'' No one can tell 
us definitely how much drug money is laundered in the United States--
but we do know that users in the United States spent at least $63 
billion dollars on drugs last year. Since assuming the office of Deputy 
Attorney General, I have made the Organized Crime Drug Enforcement Task 
Forces (OCDETF) the centerpiece of the Department's efforts to attack 
the supply side of the drug problem. The Attorney General and I 
announced this last March a new strategy to use OCDETF to go after the 
entrenched and significant drug trafficking and drug money laundering 
groups. Integral in this strategy is the use of money laundering 
charges, financial investigations, and forfeiture. In fact, new 
guidelines issued to the U.S. Attorneys' Offices now require that each 
OCDETF investigation must contain a financial component, and that the 
results of those investigations must be documented. I can assure you 
that we will be closely reviewing the results of these investigations 
in order to use our scarce resources in the most efficient way 
possible. Likewise, the Special Operations Division, a multi-agency 
operation consisting of DEA, the FBI, Customs, the IRS, and prosecutors 
from the Criminal Division, has a special money laundering unit 
dedicated to a strategy of targeting the command and the control 
elements of major drug money laundering groups. It is the best strategy 
we have to deal with organized money laundering groups, and its success 
has been demonstrated time and again.

Conclusion

    I would like to just conclude by expressing the appreciation of the 
Department of Justice for the continuing support that this Committee 
has demonstrated for the Administration's anti-money laundering 
enforcement efforts.

    Mr. Chairman and Members of the Committee, thank you for this 
opportunity to appear before you today. I look forward to working with 
you as we continue the war against terrorist financing and all forms of 
money laundering, and to refine our Strategy to address these serious 
threats. I would welcome any questions you may have at this time.
               PREPARED STATEMENT OF STUART E. EIZENSTAT
        Former Deputy Secretary, U.S. Department of the Treasury
                            October 3, 2002
    Chairman Sarbanes, Senator Gramm, and Members of the Committee, 
good morning. It is a pleasure for me to appear before this Committee 
once again. I am glad to see you Mr. Chairman, and to have one more 
opportunity, Senator Gramm, to testify before you as you end your long 
service.
    As this Committee has recognized, dealing effectively with money 
laundering is not only essential to the fight against narcotics 
trafficking, organized crime, and foreign corruption, but also it is 
critical to our national security and demands our ongoing attention. 
So, I am very pleased that the Committee is embarking on a continuing 
oversight role in this area.
    In the last year, we have watched our Government and its allies 
conduct a financial war on terrorism, as part of its broader war on 
terrorism. Words such as ``hawala'' or ``al Barakat'' have become 
staples of the nightly newscasts.
    In acting against financial aspects of terrorism, the Departments 
of the Treasury, State, and Justice have made use of an enforcement and 
policy infrastructure built up over several decades. It is well to 
review the history again. The Bank Secrecy Act was a product of the 
Nixon Administration, and the statute making money laundering a 
distinct and very serious felony in the United States was the product 
of the Reagan Administration. The first Bush Administration led the way 
in creating the Financial Action Task Force (FATF), at the G7 Summit in 
1989, and establishing the Financial Crimes Enforcement Network 
(FinCEN) at the Treasury a year later, and President Bush signed the 
Annuizio-Wylie Anti-Money Laundering Act in 1992; that landmark 
legislation authorized suspicious transaction reporting and uniform 
funds transfer recordkeeping rules, among other pillars of today's 
counter-money laundering programs in the United States and around the 
world. President Clinton used the occasion of his nationally televised 
address on the occasion of the United Nations 50th anniversary to call 
for an all-out effort against international organized crime and money 
laundering, kicking off a coordinated 5-year effort to bring the 
world's mafias and cartels to heel and finally to close the gaps in our 
laws and regulatory systems that had permitted these criminal groups to 
thrive.
    My testimony draws on my collective experience serving during the 
1990's in the Departments of Commerce, State, and Treasury. I want to 
also note that I am currently a member of a Council on Foreign 
Relations Independent Task Force on Terrorist Financing, chaired by 
Maurice Greenberg, Chairman & CEO of American International Group, and 
my participation in the work of that Task Force has informed and 
reinforced my views; I wish to make clear, however, that I am 
testifying here today in a personal capacity, and not on behalf of the 
Task Force. The Task Force is expected to issue its report later this 
month.
    The Bush Administration has made important advances in dealing with 
money laundering and antiterrorism funding. Some terrorist funds have 
been frozen. Organizations and individuals who support terrorism have 
been designated and our allies have helped block their accounts. But 
the Bush Administration has barely scraped the surface of what needs to 
be done. There is still no genuine strategy to attack money laundering 
and money launders. Our Government is still not properly structured 
internally to focus priority attention on terrorist financing. There is 
no existing international entity to work exclusively on locating and 
blocking terrorist money. And we have not applied the kind of pressure 
we must to convince nations in the Middle East and Persian Gulf, who 
are the principal locations and transit points for terrorist 
financings, to bring their laws and practices on money laundering up to 
international standards and to cooperate fully with our law enforcement 
authorities. Until these steps are taken to shut down the financial 
sources of terrorism, the Nation will remain vulnerable. Let me 
explain.
    Money laundering is simply the hidden movement of funds derived 
from crime, funds intended for illegal purposes, or--most likely--both. 
There are as many ways to hide the movement as there are ways to 
conduct other transactions. They range from simple smuggling, through 
trust-based remitters of cash, to sophisticated banking transactions 
using correspondent accounts, chains of corporate and trust ownership, 
and shell nominees, all to obscure where money comes from and where it 
goes. There are particular means that can be associated with particular 
groups--in the case of the al Qaeda and other Islamic terrorists, for 
example, reliance has been placed on the movement of funds in part 
through purported charities--some of which may actually be charities in 
whole or part--and the use of Islamic banking networks. Narcotics 
traffickers make significant use of the Black Market Peso Exchange, to 
convert large amounts of currency in the United States to export goods.
    There are also particular mechanisms or systems that all money 
launderers use and that are susceptible to abuse by them. Some of 
these--for example shell banks and unpoliced correspondent banking 
relationships--are addressed in the landmark legislation the Committee 
shepherded through the Congress last year. Others, offshore banking 
systems, differing degrees of regulatory infrastructure among states, 
and the very fact of the emergence of a global financial system, are, 
at the moment at least, facts of international financial life.
    Our law enforcement and intelligence systems are historically 
designed to track money through the financial system, so that we can 
identify, interdict, or prosecute particular criminals, including 
terrorists. But fighting money laundering means more than that. It 
requires Government at all levels to seek to throw sand in the gears of 
criminal money movement systems, wherever and whenever it can.
    Our efforts against terrorist funding provide a good example, and I 
want to discuss them in detail for that reason. According to the 
Treasury Department, since the September 11 attacks, $112 million in 
assets of terrorists and their supporters worldwide have been frozen, 
$34 million of which are in the United States, and $78 million 
overseas. Over 165 countries have issued blocking orders, and over 80 
countries have or are beginning to implement new laws to curb terrorist 
financing. The Government has disrupted several hawalas, and 
established a new registration system for such ``money service 
businesses,'' and has frozen the assets of key charitable organizations 
tied to al Qaeda.
    We have disrupted but not dismantled al Qaeda's financial network. 
During the Clinton Administration we established that the bulk of al 
Qaeda's wealth did not come from Osama bin Laden's inherited personal 
fortune, but rather from multiple sources and was distributed through 
multiple sources. Its money comes from both businesses cloaked with the 
mantle of legitimacy and from criminal activities, from petty crimes to 
the heroin trade in Afghanistan. But its principal source of money 
comes from its fundraising activities through ``charities,'' mosques, 
financial institutions, and intermediaries. Charities and individuals 
in Saudi Arabia have been the most important source of its funding. The 
Clinton Administration sent two missions to Saudi Arabia and the Gulf 
to enlist their support in shutting down these charities. We received 
virtually no cooperation.
    Just as al Qaeda uses multiple sources to raise money, it 
distributes it through multiple channels, from the global financial 
system to a network of underground, unregulated hawalas and Islamic 
banks. The organization's decentralized nature means there is no one 
single source which can be frozen.
    Thus, at what might be called the ``theatre'' level--somewhere 
between particular investigations, on the one hand, and true Strategy 
on the other--significant successes have been achieved. But I am less 
optimistic that we have a long-term strategy for sustaining the 
progress that has been made. Formulating and implementing that Strategy 
will be the challenge for the Administration in the coming months. This 
Strategy must involve both organizational changes and diplomatic 
initiatives.
    First, on the organizational side, dealing with terrorist funding 
involves regulatory and diplomatic as well as investigative approaches. 
That means effective 
coordination over time across several branches of our Government, to 
``working'' the issue in all its guises, and to convincing others to do 
so. The Interagency Policy Coordination Committee on Terrorist 
Financing, chaired by Treasury's General Counsel has made strides in 
this direction, but it is not institutionalized and does not appear to 
possess clear lines of authority. We must have a high-level coordinator 
within the U.S. Government, with the President's ear, to focus the U.S. 
Government's attention on terrorist financing. The Council on Foreign 
Relations Task Force will have more to say on this shortly. Within our 
own Government we need to assure that all of our regulatory 
information, especially the new information about money services 
businesses, is available in a coordinated fashion to all of the 
relevant agencies, and that those businesses are examined for 
compliance with the new regulatory controls.
    Second, we must ensure much greater attention at the international 
level to the problem of money laundering in general and terrorist 
funding in particular.
    The Financial Action Task Force (FATF) has done a good job of 
placing an international spotlight on those countries which do not meet 
international standards in dealing with money laundering--and can thus 
be misused by terrorist groups to launder their money. During the 
Clinton Administration, we began important elements of the dual track 
policy of tracking terrorist funds and working to upgrade international 
counter-money laundering standards that the second Bush Administration 
is carrying forward. We placed designated foreign terrorist 
organizations on the economic sanctions list in 1995 and on an expanded 
basis, to include al Qaeda and other bin Laden-linked groups, in 1998. 
As a result, the Treasury froze about $250 million in Taliban assets 
that year. We sent senior officials to the UAE, Kuwait, Bahrain, and 
Saudi Arabia in July 1999 and again in August 2000 to look at questions 
of bank and charitable organization involvement in terrorist funding. 
Even more important, we pushed forward the FATF's noncooperative 
countries and territories project in the Clinton Administration's last 
2 years. Fifteen nations were cited as being noncooperative in the 
international fight against money laundering in 2000,\1\ and the 
Treasury followed up the FATF's action and its own analysis by issuing 
hard-hitting advisories to our financial institutions recommending 
enhanced scrutiny against potential money laundering transactions 
involving those nations. The reaction was very positive. FATF's efforts 
can be credited for the fact that in the last few years anti-money 
laundering laws have been passed in Bahrain (January 2001), Lebanon 
(April 2001), the United Arab Emirates (January 2002), and Egypt (May 
2002). Panama, Israel, and Liechtenstein took important steps in 
bringing their laws up to international standards and were removed from 
the list.
---------------------------------------------------------------------------
    \1\ The list of noncooperating countries and territories in 2000 
was: the Bahamas, the Cayman Islands, the Cook Islands, Dominica, 
Israel, Lebanon, Liechtenstein, Marshall Islands, Nauru, Niue, Panama, 
the Philippines, Russia, St. Kitts and Nevis, and St. Vincent and the 
Grenadines. The Bahamas, the Cayman Islands, Liechtenstein, and Panama 
were removed from the list in June 2001, after curing most of all of 
the deficiencies FATF cited, and eight new countries--Egypt, Grenada, 
Guatemala, Hungary, Indonesia, Myanmar, Nigeria, and Ukraine--were 
added to the list in June and September 2001. In June 2002, Hungary, 
Israel, Lebanon and St. Kitts and Nevis were removed from the list, 
leaving the following 15 countries: Cook Islands, Dominica, Egypt, 
Grenada, Guatemala, Indonesia, Marshall Islands, Myanmar, Nauru, 
Nigeria, Niue, Philippines, Russia, St. Vincent and the Grenadines, and 
Ukraine.
---------------------------------------------------------------------------
    But this important multilateral initiative seems to have hit a 
snag. I am concerned that the Bush Administration may be retreating 
from the strong effort to identify noncooperative countries, those with 
seriously substandard money laundering controls and seemingly little 
political will to change them. It was reported last week that FATF is 
planning to agree this month to suspend for at least 1 year its 
practice of identifying noncooperating countries.\2\ This would be a 
serious mistake. The plan to abandon the blacklisting practice 
contemplates an increased role by the IMF and the World Bank in 
persuading countries to adopt or enhance their money laundering laws 
and regulations. Hopefully the Bush Administration will continue to 
identify and publicize noncomplying nations through the FATF process 
while also encouraging a greater role for the IMF and the World Bank.
---------------------------------------------------------------------------
    \2\ Edward Allen and Alan Beattie, ``Blacklist of `dirty money' 
havens put on temporary hold,'' Financial Times, September 26, 2002.
---------------------------------------------------------------------------
    FATF is only part of the solution. There is no international 
organization dedicated solely to tracking terrorist funds. We should 
work with our G7/G8 partners to create such an organization, working 
parallel to FATF. Again, the Greenberg Task Force of the Council on 
Foreign Relations will have detailed recommendations here which are 
still being finalized.
    The Administration needs to place the issue of terrorist funding on 
the regular agenda of every major international event, like APEC and 
ASEAN, and the twice annual EU-U.S. Summits. The Senior Level Group 
which plans these Summits can serve as a regular ``scorecard'' to 
monitor our success. Unless our EU allies and their banking systems 
employ the same approach we have, and maintain the degree of political 
commitment necessary to achieve financial transparency in these areas, 
the value of the U.S. Government's work with U.S. financial 
institutions will be greatly reduced.
    The EU countries have taken positive steps to cooperate in tracking 
down terrorist funds. But the robustness of European regulators may not 
match the strength of their anti-money laundering laws. The EU, for 
example, only bars funding by the military wing of Hamas, not its 
civilian wing, when, in fact, they are all one organization, dedicated 
to terror. Likewise, EU nations do not forbid Hezbollah funding at all. 
Their high evidentiary standards make it difficult to block assets. And 
their porous borders invite the transit of terrorist funds.
    We must continue to place financial transparency and the building 
of strong supervisory institutions conforming to international 
standards on the agenda of our bilateral and multilateral discussions 
with nations all over the world. It must be--as it appears not to be 
now--a major talking point for the President in his meetings with 
foreign leaders.
    If more effort is needed with the EU, special efforts must be made 
with countries like Saudi Arabia, Pakistan, and the Gulf States, which 
are the principal sources and transit points for terrorist money. Their 
anti-money laundering laws are weak and their follow-up no better. They 
do not deserve the diplomatic pass the Administration appears to give 
them. If we really want to put sand in the gears of al Qaeda we must 
press them to cooperate in dealing with the phony charities and 
individuals who support al Qaeda, and to come up to international 
standards on money laundering. We must speak plainly and bluntly in the 
face of noncooperation. In 
nations for which modern financial supervision and financial 
transparency are relatively new concepts, a paper commitment, or even a 
one-time series of arrests, is not the same as sustained enforcement 
and regulatory change.
    Third, we cannot stint on technical and development assistance to 
help nations build the technical capacity to supervise their financial 
systems adequately. The President's fiscal year 2003 budget allocates 
only a few million dollars to assistance in these areas; far less than 
is necessary if we expect countries to gain control over the misuse of 
their financial institutions and rogue charities.
    Fourth, we need to bring the underground hawala system into the 
Federal regulatory system and we need to simultaneously urge other 
countries to regulate and to control them.
    Fifth, we cannot leave the job to others, even to our allies. 
Without strong continuing U.S. leadership our progress will be 
marginal.
    We cannot hesitate to employ stronger measures than diplomacy when 
necessary. Last week, several House Members expressed disappointment 
that the Administration had made no use of the authority granted to the 
Treasury by Section 311 of the USA PATRIOT Act to identify certain 
aspects of terrorist financing as items of ``primary money laundering 
concern'' requiring special reporting, regulatory, or other measures, 
and I share the question they raised. This will allow sanctions short 
of a Presidential declaration under IEEPA blocking orders. In the same 
way, we will need to continue to use our economic sanctions authority 
where appropriate to freeze potential terrorist funds.
    These observations reflect a basic premise--that dealing with 
terrorist financing requires ``structure, integration, and focus'' both 
within our Government and between our Government and its allies. The 
same is true of dealing with money laundering generally.
    As I indicated, many of the same issues can be raised about other 
money laundering problems. When I spoke for the Treasury at the public 
issuance of the first National Money Laundering Strategy in 1999, I 
emphasized that:

          ``This Strategy reflects a national commitment to a 
        coordinated, effective fight against money laundering. The 
        action items it sets forth obviously cannot be 
        accomplished all at once. Rather, they are meant to lay out a 
        framework for prompt, aggressive action.''

    What I see potentially lacking in our approach now is that 
``framework.'' As the Chairman noted, 26 agencies contributed to the 
current National Money Laundering Strategy. And each no doubt had 
something valuable to add. But it is not easy to detect a guiding 
direction underneath the particular actions listed. I do not see 
``structure, integration, and focus.''
    Some of the same criticism could have been directed to our first 
Strategy, which was written at a less difficult time. But I think we 
could have met the criticism then by pointing to a consistent strategic 
thread that continues to be the necessary thread today:

 Working against money laundering systems and high-risk problem 
    areas, at the particular ways criminals and terrorists move funds;
 Coordinated enforcement and regulatory activity;
 Leveling the playing field among financial institutions, so 
    that money launders are not free to abuse some more than others; 
    and
 Making, and keeping, money laundering on the international 
    agenda.

    A final element of our Strategy was ``persistence'' and follow-
through--the recognition of the fact that it was far easier to state 
these goals than to achieve them. In drafting the first strategy we 
recognized--and intended--that institutional arrangements--a 
framework--would follow and be knit together by particular initiatives. 
That our work would, as I said before, be characterized by the need to 
learn to operate in a strategic way.
    That has not happened and it will not happen quickly. As the public 
record of our efforts to deal with terrorist financing shows, 
coordination is possible and can be effective--if it is 
institutionalized and pressed forward. I am less certain that the 
terrorism experience has been replicated in dealing with other money 
laundering issues--because other issues intervene, or simply because no 
one is responsible for making things happen. I think we are still where 
we were 4 years ago--with an idea of what we would like to have happen 
but without any clear plans or institutional arrangements to make it 
happen.
    I am especially pleased that this Committee intends to continue to 
follow this issue closely, as it is demands our utmost attention. I 
would be happy to answer any questions.
                 PREPARED STATEMENT OF ELISSE B. WALTER
        Executive Vice President, Regulatory Policy and Programs
               National Association of Securities Dealers
                            October 3, 2002
Introduction

    On behalf of NASD, I would like to thank Chairman Sarbanes, Ranking 
Member Gramm, and the Members of the Senate Banking Committee for this 
opportunity to testify.
    I am here today to tell you about measures the NASD has taken to 
assist in the implementation of the International Money Laundering 
Abatement and Financial Anti-Terrorist Act of 2001, which is Title III 
of the USA PATRIOT Act.
    My appearance comes almost a year after the enactment of the USA 
PATRIOT Act--a year during which the NASD has worked closely with the 
Securities and Exchange Commission, the Treasury Department, other 
regulators, and members of the securities industry to begin 
implementation of those aspects of the USA PATRIOT Act that apply to 
broker-dealers.
Overview

    Let me begin with a brief overview of NASD--because knowing our 
mission and how we operate will help you understand NASD's role under 
the USA PATRIOT Act. As the world's largest self-regulatory 
organization (SRO), NASD has been helping to bring integrity to the 
markets for more than 60 years. Investor protection and market 
integrity are at the core of NASD's mission and are the foundation of 
the success of U.S. financial markets.
    Under Federal law, every securities firm doing business with the 
American public is required to be a member of NASD. Currently, roughly 
5,500 brokerage firms, 90,000 branch offices, and over 670,000 
registered securities representatives come under NASD's jurisdiction.
    NASD writes rules that govern the behavior of securities firms. 
These rules become final upon approval by the SEC. The NASD examines 
firms for compliance with these rules (as well as for compliance with 
SEC rules and the Federal securities laws), investigates possible 
violations of securities laws and regulations, and disciplines members 
and their employees when violations occur. NASD also is responsible for 
professional training, licensing and registration, dispute resolution 
and investor education.
    While our regulatory jurisdiction is limited to our broker-dealer 
member firms and their associated persons, our examinations, 
surveillance, and regulatory intelligence alert us to illegal conduct 
outside of our jurisdiction. We routinely refer such findings to the 
SEC, the States, and criminal prosecutors for their action. We provide 
technical assistance to Federal, State, and local prosecutors and 
agents throughout the country on matters within our regulatory 
expertise. More than 200 defendants have been convicted of felonies in 
cases where we assisted criminal authorities. These matters have 
included not just ``traditional'' securities fraud, but also cases 
involving organized crime, money laundering, and most recently 
terrorist financing.
Money Laundering and the Securities Industry

    Prior to the passage of the USA PATRIOT Act, NASD had some 
experience overseeing the securities industry's compliance with anti-
money laundering regulations. Broker-dealers have long been subject to 
the reporting requirements of the Bank Secrecy Act. For example, in 
July 2001, NASD Enforcement filed a complaint against a registered 
representative who worked with a securities firm affiliated with a 
large U.S. banking company, alleging that she, among other things, had 
structured currency transactions to evade Federal reporting 
requirements and had caused her 
employer (an NASD member firm) to fail to file a currency transaction 
report, as required by the Bank Secrecy Act.
    In that case, the firm had a policy of prohibiting representatives 
from accepting cash from customers. The firm, however, also had anti-
money laundering policies and procedures in place to ensure compliance 
with the Bank Secrecy Act, including the filing of currency transaction 
reports, in the event that a cash transaction occurred. Despite the 
firm's prohibition, the registered representative agreed to accept 
$50,000 in cash from a customer. When the customer insisted that the 
representative not report the transaction, the representative agreed to 
structure the deposits into an account in the name of the customer's 
mother through cashier's checks in increments below the threshold for 
reporting.
    In August of this year, NASD's Office of Hearing Officers issued a 
decision in the case, finding the registered representative liable for 
structuring and for causing her firm to fail to file a currency 
transaction report. NASD barred this representative from being 
associated with any NASD member firm in any capacity. (See Press 
Release at http://www.nasdr.com/news/pr2002/release_02_048.html.) NASD 
was able to enforce the Bank Secrecy Act regulations under NASD Rule 
2110, which obliges firms and associated persons to ``observe high 
standards of commercial honor and just and equitable principles of 
trade.''
    Nonetheless, prior to passage of the USA PATRIOT Act, the 
securities industry had limited experience with anti-money laundering 
regulations. While subject to the Bank Secrecy Act reporting 
requirements, most securities firms, as a matter of policy, prohibit 
cash transactions. Many broker-dealers, therefore, do not have the 
experience of filing currency transaction reports. And although NASD, 
since as early as 1989, has recommended that all broker-dealers file 
suspicious activity reports (SAR's) with the Treasury Department's 
Financial Crimes Enforcement Network (FinCEN), only broker-dealers that 
were subsidiaries of banks or bank holding companies were required to 
do so by Federal law.
    Before the tragedy of September 11, NASD participated in a 
significant collaborative effort with the New York Stock Exchange 
(NYSE) and the SEC to conduct joint examinations of a group of broker-
dealers to determine the scope and the effectiveness of their anti-
money laundering compliance programs. We learned that, although many of 
the larger broker-dealers had implemented comprehensive anti-money 
laundering procedures voluntarily, most broker-dealers had not 
implemented programs that went beyond the reporting requirements of the 
Bank Secrecy Act.
NASD Rulemaking Under the USA PATRIOT Act

    The USA PATRIOT Act imposes a number of new anti-money laundering 
requirements on the securities industry. This is uncharted territory 
for many broker-dealers. NASD has worked over the last year to use our 
regulatory tools and resources to educate broker-dealers about and 
monitor compliance with these new requirements under the USA PATRIOT 
Act.
    To that end, NASD proposed a new rule, Rule 3011, to establish the 
minimum standards for broker-dealers' anti-money laundering compliance 
programs, which Section 352 of the USA PATRIOT Act required all broker-
dealers to develop and implement by April 24, 2002. On April 22, 2002, 
the SEC approved NASD Rule 3011 and the NYSE's substantially similar 
rule, Rule 445.
    NASD Rule 3011 requires firms to develop and implement a written 
anti-money laundering compliance program that is approved in writing by 
a member of senior management and, at a minimum:

    (1) establishes and implements policies and procedures that can be 
reasonably expected to detect and cause the reporting of transactions 
required under 31 U.S.C. Sec. 5318(g) (which governs SAR's) and the 
implementing regulations thereunder;
    (2) establishes and implements policies, procedures, and internal 
controls reasonably designed to achieve compliance with the Bank 
Secrecy Act and implementing regulations thereunder;
    (3) provides for independent testing for compliance to be conducted 
by member personnel or by a qualified outside party;
    (4) designates an individual or individuals responsible for 
implementing and monitoring the day-to-day operations and internal 
controls of the program; and
    (5) provides ongoing training for appropriate personnel.

    After the SEC approved NASD Rule 3011, the Treasury Department 
stated that broker-dealers would be deemed in compliance with the USA 
PATRIOT Act requirement to implement an anti-money laundering 
compliance program if they were in compliance with NASD Rule 3011 and 
NYSE Rule 445.
    NASD Rule 3011 allows NASD to examine and enforce compliance with 
anti-money laundering program requirements. We began that effort as 
soon as the rule went into effect earlier this year. Through our 
examinations, we determine whether firms have the required compliance 
programs and assess deficiencies in firms' programs. On a firm-by-firm 
basis, we determine what action to take after each examination. In 
addition, the information we gather through our examinations enables us 
to determine areas of common misunderstanding so that we can develop 
new guidance for firms to help them comply. We are coordinating with 
the NYSE by sharing examination procedures to ensure that, as 
regulators, we are following a consistent approach and to make certain 
that our procedures are as comprehensive as possible. In addition, 
where examinations involve firms that are members of both NASD and the 
NYSE, we are coordinating our reviews for compliance with the anti-
money laundering compliance program requirements.
    According to our most recent examination results, approximately 94 
percent of firms had developed and implemented anti-money laundering 
compliance programs. Our goal, of course, is 100 percent compliance, 
but the examination results show that firms recognize their 
responsibilities and have taken the necessary steps to meet their 
obligations under the Act. Those firms that NASD examiners found to be 
deficient in this area received a Letter of Caution and, pursuant to 
the terms of the Letter of Caution, were required to demonstrate to 
NASD examiners that necessary procedures were in place, and 
deficiencies corrected, within 30 days. Firms that continue to 
disregard their obligations to develop and implement anti-money 
laundering compliance programs that contain all the necessary 
procedures will face NASD Enforcement actions that could lead to 
substantial fines, suspensions, and even expulsion from the industry.
    While examining to determine whether firms have proper anti-money 
laundering procedures, NASD examiners, at times, have confronted 
situations where firms had evidence of suspicious activity but did not 
file a SAR. For example, in one instance, an examiner conducting a 
routine examination noted signs of suspicious structuring transactions. 
The customer, over a period of time and on numerous occasions, had 
deposited a total of over $10,000 in money orders into an account. None 
of the money orders was for more than $700. The customer then wired 
thousands of dollars to a bank located in a foreign country. The firm 
had not voluntarily filed a SAR. NASD staff referred the matter to an 
appropriate Government agency for review.
    As noted, while the SAR reporting requirements do not become 
effective until the end of this year, NASD has suggested that firms 
make voluntary SAR filings, when warranted. We will continue to be 
vigilant during our examinations of our firms and, where appropriate, 
refer instances of suspicious activity to the appropriate Federal 
authorities.
Additional NASD Anti-Money Laundering Initiatives

    NASD has also launched a variety of other anti-money laundering 
initiatives to assist firms in developing and implementing their anti-
money laundering compliance programs and in complying with other 
aspects of the USA PATRIOT Act.

Notices to Members

    NASD has published the following ``Notices to Members'' 
(Attachments held in Senate Banking Committee Files):

    Notice to Members 01-67, Terrorist Activity (October 2001). This 
Notice informed members of President Bush's Executive Order freezing 
the property of, and prohibiting transactions with, certain 
individuals. It explained how members could access the Treasury 
Department's Office of Foreign Assets Control's (OFAC) website and 
recommended that firms establish compliance programs to avoid 
violations and possible enforcement actions.
    Notice to Members 02-21, Guidance to Member Firms Concerning Anti-
Money Laundering Compliance Programs (April 2001). This Notice 
explained in detail the requirements that the USA PATRIOT Act and NASD 
Rule 3011 impose on broker-dealers and provided guidance to assist 
broker-dealers in developing anti-money laundering compliance programs 
that fit their business models and needs.
    Notice to Members 02- 47, Treasury Issues Final Suspicious Activity 
Reporting Rule for Broker/Dealers (August 2002). When the Treasury 
Department issued its final rule governing SAR's, NASD issued this 
Notice to Members to explain the requirements of the rule and to notify 
members of the deadline for comments on the proposed SAR's form for 
broker-dealers.
    Notice to Members 02-50, Treasury and SEC Request Comment on 
Proposed Regulation Regarding Broker/Dealer Anti-Money Laundering 
Customer Identification Requirements (August 2002). This Notice 
explained to members the proposed regulations regarding customer 
identification and verification and notified them of the deadline for 
submitting comments on the proposed rule.
AML Template

    Many smaller securities firms did not have the extensive experience 
with anti-money laundering regulations of the large, bank-affiliated 
firms, and were uncertain about how the various USA PATRIOT Act 
requirements would apply to them. To assist them, NASD developed a 
detailed template that firms can use in fulfilling their 
responsibilities to establish an anti-money laundering compliance 
program. (A copy of the template is being held in Senate Banking 
Committee files.)
    Congress wisely made the anti-money laundering program requirement 
flexible enough so that each firm could tailor its program to the 
firm's size, business activities, and customer base. The template, 
which firms can download from our website, www.nasd.com, provides 
language that firms can tailor to address their particular situations. 
Our template urges firms to develop procedures even for those 
activities, such as cash transactions, that the firm prohibits. That 
way, the firm will have procedures to detect when the policy has been 
breached and, if breached, to ensure that the firm complies with any 
applicable anti-money laundering regulations.
    In addition to giving detailed explanations of the many regulations 
and how they would apply to various business relationships and 
financial products, the template contains instructions and links to 
other resources that are useful for developing an anti-money laundering 
compliance program. The NASD template has had over 7,600 visits since 
going live in July of this year.
Workshops

    NASD also conducted two phone-in workshops for member firms 
concerning the USA PATRIOT Act and anti-money laundering compliance. We 
held these workshops on April 19 and May 21 of this year and over 1,000 
participants called in to join them. We plan to conduct another 
workshop this month to address the customer identification and 
verification requirements, which firms will have to implement by 
October 26. In addition to the workshops for member firms, NASD has 
hosted two anti-money laundering workshops for our examiners.
OFAC Search Tool

    NASD has created a search tool, which is accessible through NASD's 
anti-money laundering website and enables firms to electronically 
search OFAC's ``Specially Designated Nationals and Blocked Persons'' 
list. There have been over 17,000 visits to our OFAC search tool since 
its launch in June.
Website Information and Online Training

    In addition to our Notices to Members, our template and our OFAC 
search tool, our Web page provides links to all of the reporting forms 
that firms will need for anti-money laundering compliance, as well as 
to various other sources of anti-money laundering information. NASD 
attorneys have also participated in numerous speaking engagements to 
discuss anti-money laundering issues and to answer firms' questions, 
and they will continue to do so at our upcoming Fall Conference in San 
Diego and at the NASD Institute in Baltimore.
    We have also developed an online anti-money laundering training 
course, which firms can use to meet their statutory obligations under 
the USA PATRIOT Act and NASD Rule 3011 to develop an on-going anti-
money laundering training program for employees. As of August 31, over 
6,000 people had registered for our online training course.
Coordination Between NASD and Government

    Coordination and communication with the Treasury Department and the 
SEC have been indispensable in this area. Throughout this process, the 
Treasury Department and the SEC have provided us with information that 
we have needed to 
develop anti-money laundering initiatives to assist broker-dealers, and 
they have provided helpful and timely comments on our template and the 
various publications that we have issued. This has enabled NASD to work 
efficiently, to present consistent interpretations and instructions to 
the industry and to define our expectations for firms under the 
regulations.
    Continued coordination among regulators will remain critical in the 
future. Significant issues remain concerning how this regulatory regime 
that has historically applied to depository institutions will apply to 
the securities industry. We are pleased that the Treasury Department 
was receptive to hearing about how the application of these proposed 
regulations might affect the various participants in the securities 
industry, and we look forward to continuing our dialogue with Treasury 
on these and similar issues in this very important area.
Conclusion

    I am pleased to have this opportunity to share with the Committee 
NASD's part of the extensive efforts that have been made over the 
course of the last year to ensure compliance with the anti-money 
laundering provisions of the USA PATRIOT Act. NASD pledges to continue 
to work with Congress, Treasury, the SEC, and other regulators in 
implementing and enforcing this important law.

               PREPARED STATEMENT OF ALVIN C. JAMES, JR.
             Former Senior Money Laundering Policy Advisor
                    U.S. Department of the Treasury
                            October 3, 2002
    Thank you, Mr. Chairman, Senator Gramm, and Members of the 
Committee. I am very pleased to be given this opportunity to return to 
your Committee to speak to you today about our Government's anti-money 
laundering programs and strategy. My name is Alvin James and currently 
I serve as the leader of the Anti-Money Laundering Solutions Group at 
Ernst & Young, LLP. However, the views I am expressing here are my own 
and do not necessarily reflect the views of Ernst & Young.
    A little over 3 years ago, I retired from Federal service after 27 
years of law enforcement within the U.S. Treasury Department. Most of 
my public service was spent as a Special Agent with IRS Criminal 
Investigation Division where I specialized in International Undercover 
Money Laundering Investigations. I spent the last 5 years of my Federal 
law enforcement service at the Financial Crimes Enforcement Network 
(FinCEN) concluding the last 2 years as its Senior Anti-Money 
Laundering Policy Advisor. It was at FinCEN that I collaborated on 
developing a model that explained what is generally recognized as the 
largest money laundering system in the Western Hemisphere--the Colombia 
Black Market Peso Exchange (BMPE). That model, which was developed 
using law enforcement intelligence, describes how this underground 
financial system works and identifies vulnerable choke points. During 
my tenure at FinCEN I also served as the founding Chairman of the 
Treasury Under Secretary for Enforcement's BMPE Working Group.
Introduction
    Mr. Chairman, I believe the current efforts and strategy of our 
Government to prevent the laundering of illicit funds or the 
transferring of funds for illicit purposes within our borders are 
falling short of the mark. This failing is not primarily due to a lack 
of diligence on the part of our criminal justice and regulatory 
agencies. It stems more from the nature of our enforcement system and 
the means by which the performance of our enforcement agencies are 
measured than from a basic unwillingness to work together and get the 
job done.
    The source of this failure lies at a fundamental level. We continue 
to fail as a Government to adopt an enforcement strategy to disrupt and 
deter the way money is laundered through our nations financial 
institutions. The major money laundering is a systemic crime. Systemic 
crime is crime brought about by an illicit demand within society that 
is not dependant upon the action of any particular individual or group 
of individuals. Therefore, the criminal conduct cannot be effectively 
deterred by the threat of prosecution, fines, or imprisonment. Systemic 
crime is crime that for various reasons will always have a new criminal 
ready to step up when his predecessor falls to criminal sanctions. 
Systemic crime is not limited to the financial arena. Indeed, there are 
broader and more serious areas of crime that also fall within this 
definition. When they thrive it is largely do to the choice of our 
Government to use the singular weapon of prosecution as our only 
deterrent. When we fail to acknowledge the shortcoming of prosecution 
as the sole deterrent in critical areas then we also fail to strategize 
toward a more effective means of disruption and elimination of the 
criminal systems that plague our Nation.
    To illustrate my point let us look at two well-known areas of 
systemic crime. The demand for narcotics and the systems that fuel that 
demand is an example of systemic crime. One of the reasons we have not 
done better in fighting the war on drugs is that we continue to pursue 
the fight on a case-by-case basis. And yet there seems to be no limit 
to drug users, sellers, distributors, smugglers, manufacturers, and 
money launderers. The performance of the agencies charged with fighting 
the war on drugs is measured by the respective arrests and prosecutions 
to their credit. This performance measure of course skews their 
strategies in that direction whether or not those strategies have an 
ultimate impact on the criminal system. These performance measures also 
tend to steer them away from coordinated action with other agencies, 
with which they would have to share the credit. Worst of all, they are 
dissuaded from the development of a more effective strategic approach 
even when they try to do so. We are not winning the war on drugs and 
yet we have continued to fight for over 20 years without any sustained 
deviation in our strategy.
    Our internal war on terrorism and the movement of terrorist funds 
is another area of systemic crime. Our efforts to combat terrorism 
within our borders seems to be gaining ground because we have not 
focused on prosecution as our only tool or even our primary tool to 
disrupt and dismantle the terrorist's ability to harm to our country 
and our people. Cooperation and coordination of strategy continue to be 
key areas of concern. Yet, we seem to recognize that we can offer no 
form of prosecution and punishment that will deter an individual who 
will give up his own life, not as a sacrifice for his cause, but as a 
privilege that will bring everlasting rewards to the individual and 
substantial financial rewards to his family? Our law enforcement 
community is well-suited to address these terrorist systems, just as 
they are well-suited to address the systems that distribute illegal 
drugs and launder the profits from their sale. For the war on terrorism 
to continue to be effective and for the war on drugs and major money 
laundering to begin to have a deterrent effect, the enforcement 
community must be unfettered by removing total reliance on performance 
measures directed solely toward the arrest and conviction of 
individuals. They have the knowledge and expertise to develop 
strategies, within the boundaries and individual protections of the 
Constitution, which will disrupt and dismantle the principal criminal 
systems wreaking havoc in our country today. They must be encouraged to 
develop and implement these systemic strategies. We cannot afford to 
wait for another 20 years.
    Mr. Chairman, by continuing to provide a forum to air these 
critical issues. Your Committee is providing the leadership needed to 
bring financial criminal enforcement to this new plateau. It is 
essential that our Nation begin to recognize the shortcomings of our 
current strategies in regard to systemic crime. Only then can we begin 
to develop new plans operating outside the box of conventional wisdom. 
As I continue in my testimony I will set out numerous areas of systemic 
abuse of our Nation's financial structure. These areas of abuse do not 
seem to be deterred by traditional means of arrest and prosecution. I 
will also suggest an approach to most effectively design and implement 
a strategy to combat systemic crime within our enforcement and 
regulatory communities. I urge you use the powers of this Committee to 
continue to encourage this Nation's financial enforcement and 
regulatory community to consider a more effective means of financial 
law enforcement and regulation designed to combat these areas of 
systemic abuse.
Current State Assessment
    As stated, the current focus of financial criminal investigations 
is most often on individuals or a particular illicit enterprise. Even 
if this focus falls on a particular area of systemic concern, such as 
Hawala and its movement of terrorist funds, it still relies on fines or 
prosecution of individuals as the primary strategy of deterrence. What 
is even more troubling is the spirit of competition rather than 
cooperation fostered by these strategies of prosecution. There is 
little incentive to cooperate when eventually only one agency will be 
credited with the prosecution. If a deal is struck it usually involves 
some sharing of the count. This most often involves double counting 
which then distorts the statistics and still does little to counter the 
systemic abuse.
    Similarly, from the civil regulatory perspective, while regulatory 
efforts may be aimed at areas of systemic concern, they generally rely 
on regulatory sanctions aimed at an individual institution or business. 
As in the enforcement community, there seems to be little regard for 
whether or not these sanctions will, in fact, impact the particular 
area of systemic abuse. Regulation of Money Service Businesses (MSB's) 
is a good example of this lack of effective strategy. The first phase 
of this regulation is the registration of all MSB's. The most infamous 
type of MSB at the moment is the Hawala money remitter system that I 
will describe in more detail later. For now, suffice it to say that 
even if Hawala brokers in the United States are successfully 
registered, such registration is unlikely to impact the illicit use of 
this system to move terrorist funds or launder drug money. It is too 
easy for this system to hide its dealings inside other transactions. 
Registration will certainly not have an impact unless it is part of an 
overarching strategy designed to eliminate the illicit use of this 
system. It is not clear that such a strategy exists or which agency 
would administer it if it did exist. From the criminal law enforcement 
perspective, in order to be effective the strategy will have to exceed 
reactive prosecution of known illicit transfers through unregistered 
institutions. Without effective strategies in place, counting the 
number of Hawalas or other (MSB's) that have been registered is 
meaningless as a measure of performance for any agency held 
responsible, as well as a meaningless measure of effective money 
laundering control for our Government as a whole.
    There is also little incentive for the enforcement and regulatory 
community to cooperate strategically toward a systemic target. The 
enforcement community views the regulators, with some justification, as 
uncooperative when asked to respond with specific information in regard 
to a particular institution or its client. In turn the regulators view 
law enforcement, again with some justification, as ham fisted and naive 
as to the working of financial institutionsm, as well as their 
interactions with their regulators. The financial service sector itself 
has also offered little incentive to observe or report systemic abuse 
of their systems. Most institutions see the Suspicious Activity Reports 
(SAR's) they file on individual behavior as going into a black hole 
with little if any feedback as to their relative effect. Once again 
they are somewhat justified in this position. Why then would they take 
the extra step of pointing out systemic abuse when there has been 
little or no effort on the part of Government to describe the abuse or 
work with the institutions in a partnership to build a defense?
    Mr. Chairman, our National Money Laundering Strategy is replete 
with all the right buzzwords--money laundering systems, interagency 
cooperation, coordination of effort, and information sharing. 
Unfortunately, these strategies have failed to 
enhance our ability to deter systemic money laundering. They have 
failed because at the root of our efforts we cling to prosecution as 
primary tool and our primary measure of success. We must use all the 
tools in our tool chest if we are to build a solution to systemic money 
laundering.
Areas of Systemic Abuse
Correspondent Banking
    International correspondent banking is the network within the 
traditional financial sector that facilitates global bank-to-bank 
business, as well as providing foreign exchange for clients who do not 
have their own individual foreign accounts. Simply stated, foreign 
banks maintain accounts similar to checking accounts in banks within 
countries that they or their clients wish to do business. Of course, 
the United States is essential for any foreign bank wishing to offer 
the potential of foreign trade financing to its clients. This network 
is especially vulnerable to money laundering because money is taken in 
through one governmental jurisdiction and placed in another. The USA 
PATRIOT Act began to bring attention to these correspondent 
relationships.
    However, in spite of this attention, this network is currently 
being abused as the primary narcotics currency placement vehicle for 
the Colombian Black Market Peso Exchange (BMPE). The traditional means 
used to place narcotics currency into U.S. bank accounts controlled by 
the BMPE dollar/peso broker was to make small deposits to accounts in 
the United States that were less than the threshold of the BSA 
regulatory barrier. Due to increased enforcement and regulatory 
pressure, the BMPE system has shifted its major currency placement to 
the foreign correspondent banking network. Foreign banks, willing to 
accept anonymous currency deposits in exchange for either checks or 
wire transfers drawn on their U.S. correspondent banking accounts, now 
provide the means to place BMPE narcotics currency into the U.S. 
financial system. These institutions are located throughout the world 
and are certainly not limited to those countries that have been 
designated as noncompliant for anti-money laundering purposes.
    Once the currency is placed in the U.S. accounts the BMPE brokers 
sell the dollars and then transfers them for their clients via checks 
and wire transfers. These instruments are used to make payment for 
foreign trade and to fund bank and brokerage accounts in the United 
States. These transactions completely break the chain of transparency 
sought by the world's financial institutions and their respective 
governments.
Money Remitters
    Numerous other systems similar to Hawala and BMPE exist throughout 
the world. They all offer similar services of foreign exchange and 
small dollar money remittance through informal networks based on 
ethnicity and trust. They exist in Asia, Africa, and South America and 
they all have branches in other lands based on the diasporas of their 
people. These branches often have brokers who use the traditional 
financial systems to maintain their parallel accounts that facilitate 
their 
informal systems. By their very nature they are also vulnerable to 
money launders and individuals who would surreptitiously transfer funds 
for illicit purposes.
Gold Broker Networks
    The U.S. Government has taken little notice of the workings of 
these networks within our country or the world. Nonetheless, it is 
possible to transfer millions of dollars of value internationally 
within these amorphous networks with no paper trail. The transfers can 
go from the souks of Dubai, India, and the Far East to the brokers of 
Switzerland and Italy to the coin shops of the United States. As in the 
remittance systems, the transfers are made on trust and settlement for 
the transfer is usually arranged via parallel transactions going in the 
opposite direction. It is very likely that recent transactions of 
terrorist funds were moved through this 
network.
False Invoicing
    This means of covertly moving funds from one country to another has 
existed for centuries and is well-known and well-documented. As with 
the others mentioned, it remains basically untouched by U.S. law 
enforcement. The following is a simple example of the process. A 
Colombian drug lord wishing to launder drug currency held in the United 
States might first establish a front retail jewelry business in the 
United States. Next, green glass is shipped from Colombia to the front 
business in the United States and is described as emeralds. The front 
company deposits drug currency disguised as business receipts and then 
wires out payments for phony emeralds to the Colombian drug lord. The 
drug lord has thus transferred his illicit proceeds to Colombia with a 
built-in legitimate story disguising their true source.
Remittance Companies
    These firms should be distinguished from money remitters in that 
they offer discrete international transfers of funds for wealthy 
individuals and firms along the lines of the services provided for 
private banking clients within the legitimate financial industry. They 
do so by moving these funds through their accounts without notice to 
anyone of the true ownership of the funds. There may be legitimate 
reasons for the existence of these firms such as the need to amass 
funds secretly for strategic business advantage. However, due to their 
obvious potential to launder money and facilitate other anonymous 
transfers, it should not be left totally up to the banking community to 
regulate their activity through Suspicious Activity Reporting.
Hawala
    Hawala is an ancient system based on trust within ethnic and 
familial relationships. It is important to note that this system has 
been unregulated for most of its existence. An equally important factor 
is that most funds transmitted by this system are legitimate foreign 
exchange or remittance transfers. However, it is clear that 
illicit funds and funds intended for illicit purposes including 
terrorism are also transmitted by this system. It is unlikely that this 
amorphous system will lend itself to traditional forms of regulation. 
New regulatory and criminal enforcement strategies will have to be 
devised based on a more through understanding of the system than we 
have today.
    Another alternative is to outlaw the system altogether in the 
United States. However, an attempt to outlaw this system will only 
drive it from the front of the bodega to the back room or the parlor 
upstairs. Attempts to outlaw this system will also thwart its 
substantial legitimate purposes. One key use is foreign exchange for 
the ``unbanked'' third world, thus promoting desperately needed 
commerce in these areas. Another important function is money 
transmissions to family ``back home.'' In addition to being legal and 
harmless this is arguably our most efficient and least costly form of 
foreign aid. In any case, as with all the systems described here, this 
system exists because there is a demand for it that has not been met 
otherwise. As long as the demand exists there will most likely be a 
similar system to meet it, whether we try to outlaw it or not.
Colombian Black Market Peso Exchange (BMPE)
    The BMPE is perhaps the U.S. enforcement community's best-known 
underground money remitter and foreign exchange system. Although it has 
technically always been illegal in Colombia, it began as a gray market 
designed to evade Colombian import tariffs perceived to be excessive by 
the Colombian business community. However, its function became much 
more heinous from the international perspective when its source of 
funds evolved to be almost exclusively wholesale narcotics proceeds.
    Like all underground and unregulated systems this system is 
flexible and quickly adapts to efforts to thwart its access to the 
world's legitimate financial systems including those in the United 
States. I have described a major adaptation of this system in my 
previous section on Correspondent Banking. Although this system has 
been known to U.S. law enforcement for over 20 years it continues to 
adapt and to maintain its status as the vehicle of choice for the 
Colombian drug lords to launder over $5 billion dollars per year.
A Proposal
    A coordinated effort using all the tools available to the 
Government is the key to disrupting and dismantling systemic financial 
crime. A home agency solely responsible for systemic criminal law 
enforcement and BSA regulatory policy and enforcement is the best means 
to achieve this coordination. I strongly suggest the new agency be 
given the power via Presidential directive to coordinate all 
investigations impacting systems of financial crime that are a threat 
to our national security. This power should include investigations in 
other agencies that are related to these particular systems. I also 
believe it is essential to see that the new agency has the security 
clearances necessary to coordinate its strategies with the intelligence 
community. Finally, it is vital that this new agency include this 
Nation's financial sector as a partner in designing and implementing 
overarching strategies designed to impact systemic financial crime.
    The problem of overlapping jurisdiction has always been an 
impediment to cooperation and coordination of the investigations 
related to systemic financial crime. Anti-money laundering is 
necessarily a fragmented jurisdiction due to the numerous substantive 
crimes that generate illicit funds. However, the recognition of 
systemic crime gives rise to a logical division of effort along the 
lines of systemic enforcement verses individual prosecution. The agency 
I have proposed that would be charged with systemic financial 
enforcement could pass off individual cases to the appropriate agency, 
thus providing an incentive for cooperation rather than competition. In 
addition, the performance of the systemic crime agency could be 
measured along the lines of its strategy, which would not directly 
include individual prosecution.
    As an example of the type of coordinated strategy that might arise 
from the 
agency I propose, let me turn to the area I know best, BMPE. The goal 
of the following strategy is to force the BMPE money launder and the 
Colombian drug lord to use processes to launder drug money that are 
less suited to their purpose and thus easier to detect and attack by 
both systemic and traditional criminal enforcement. First, a 
coordinated series of disruption oriented undercover operations could 
be added to the strategic plan. These operations can infiltrate the 
BMPE money laundering organizations and then use their insider status 
at just the right moment to seize or otherwise divert the funds they 
have been trusted to launder. Then a BSA Geographic Targeting Order 
(GTO) directed at correspondent banking accounts that are funded with 
substantial currency deposits. An international arm could be included 
that would coordinate the impact of intelligence to be shared with 
Colombian or other foreign law enforcement agencies. In addition, 
related individual investigations could be coordinated in such a way as 
to maximize their effect on the overall system. Finally, the private 
sector could be included by advising them at the most opportune moment 
of the overall scheme, as well as the specific countries, foreign 
banks, or particular accounts that are known to be involved in the 
system.
    The overall strategy could be designed to shake the confidence of 
the illicit users of the system. On the one hand they would lose 
confidence that the money they launder is safe and will be returned to 
them. In addition the appropriate individuals involved could be passed 
on for individual investigation not only in our country but also by 
their own law enforcement as well. Those who maintain legitimate 
businesses could find their ability to use the financial institutions 
throughout the world hampered by their link to narcotics crime. 
Providing the identity of the known users of the money laundering 
system to the international press could further shame and deter future 
use of the system. The final effect is to eliminate the market for BMPE 
dollars in foreign exchange. Such a coordinated effort as part of an 
overall strategy to attack a system of financial crime could begin to 
impact the system itself rather than just chip away at the individuals 
involved.
    Mr. Chairman, thank you for allowing me this opportunity to express 
my views. At the least, I hope my comments will foster debate directed 
at more effective enforcement of systemic financial crime and more 
efficient use of the tools available in our enforcement community.









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